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The SEC’s Small Business Advisory Committee Meets to Discuss Accredited Investors and IPOs

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The SEC’s Small Business Advisory Committee Meets to Discuss Accredited Investors and IPOs

VerifyInvestor.com

A meeting of the Small Business Capital Formation Advisory Committee (“Small Business Committee” or “Committee”), which provides advice and recommendations to the Securities and Exchange Commission (SEC) on matters relating to the regulation of small businesses, has been scheduled for February 27, 2024.

Two important issues on the Committee’s agenda are: 

  1. The definition of accredited investors, and 

  2. Initial Public Offerings (IPOs).

The Small Business Committee meets quarterly to discuss SEC rules and regulations applicable to small businesses — including smaller public companies. The Committee functions as a formal mechanism for providing the SEC with feedback and advice on how SEC rules and policies impact small businesses. 

Small Business Capital Formation discusses the “accredited investor” definition. 

As noted in a prior post published on the VerifyInvestor.com blog, the SEC has been considering whether to revise the current definition of “accredited investor” to increase the annual wealth threshold and net worth limits that individuals and entities must meet to be considered “accredited investors.”

Regulation D (“Reg. D”) of the Securities Act of 1933 (“Securities Act” or “the Act”) creates exemptions from the SEC registration requirements for small businesses if:

  1. All investors in a private offering are “accredited investors” (Reg. D, Rule 506 (c)), or 

  2. No more than 35 participants in a private offering are non-accredited investors. (Reg. D, Rule 506 (b).)

Investor accreditation is an essential part of qualifying for an exemption under Regulation D. Yet it can be difficult for a private equity fund or issuer to find accredited investors. Using an investor accreditation program can help. Also, investors who can prove their accredited status with an accredited investor certificate can participate more easily in private offerings. 

The current wealth threshold for an “accredited investor,” is found in Rule 501 of Reg. D. This definition currently requires an individual desiring to be verified as an “accredited investor,” to prove that in the most recent two-year period, they have an income in excess of $200,000 USD or a net worth (excluding a primary residence) of over $1 million USD. An investor can also qualify as an “accredited investor” under the current definition if they have a joint income with their spouse (or spousal equivalent) in excess of $300,000 USD, and they have a reasonable expectation of reaching that same income level in the upcoming year. 

Among other things, at their February 27 meeting, the Small Business Committee discussed and considered many comments and suggestions regarding whether or not the wealth threshold in the definition of “accredited investor” should be linked to inflation. 

Critics of indexing the definition to inflation argued strenuously that doing so would significantly limit the number of people who could qualify as “accredited investors.” 

After a thorough examination of the issue, the Committee voted to recommend that the SEC not index the current net worth and income thresholds in the definition of “accredited investor” to inflation.

The Committee agreed that investor education is essential for small business owners. In light of that finding, the Committee voted to allow investors who do not meet the accredited investor wealth thresholds to invest in one 12-month period, up to five (5%) percent of their income or net worth if they meet certain criteria establishing their “sophistication” as an investor, or if they pass a certification test. 

Lastly, on this issue, the Committee agreed that the SEC should require all private placement documents to contain a “risk statement.” 

Small Business Capital Formation Advisory Committee considers the decline in IPOs. 

Finally, the Committee listened to several presentations on the issue of the decline of Initial Public Offerings (IPOs) and how that is impacting small businesses.

It is anticipated that the SEC will publish a report on the Small Business Committee’s findings and recommendations shortly.

At VerifyInvestor.com we understand the regulatory challenges facing issuers and investors alike. That’s why we offer world-class accredited investor verification services. Our services are fast, efficient, cost-effective, confidential, and reliable. We help companies fully and easily comply with their legal obligations to verify investors as accredited investors.

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