SEC posts concept release on harmonization of private securities offering exemptions

SideBar

SEC officials have recently been laying the groundwork for the new concept release. For example, at the May Small Business Capital Formation Advisory Committee, Corp Fin Director Bill Hinman described the objective of the concept release as developing a system that is better suited to the business life cycle of companies.  As part of that review,  he said, the staff was looking at whether it still made sense to retain the accredited investor definition as it currently stands—as a binary test, in which, if you do not exceed the threshold, you cannot participate at all, but if you do exceed the threshold, you can participate to any extent in the transaction. Alternatively, it might be more appropriate to scale the level of investment permitted relative to the wealth of individual.  Hinman noted that the concept release would fold in prior recommendations from the Committee’s predecessors. (See this PubCo post.)

Those prior recommendations may include the advice from the SEC Committee on Small and Emerging Companies (which then morphed into the Small Business Capital Formation Advisory Committee) in 2015 and 2016, which urged the SEC to “do no harm” with regard to the accredited investor definition.  And, in the committee’s final meeting in 2017, the members advised against raising the individual income and net worth thresholds, which “would considerably decrease the number of households that qualify as accredited investors,” and have a disparate impact on areas with a lower cost of living (and, typically, lower venture capital activity), as well as on women and minority entrepreneurs. The committee expressed its support for “expanding the definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors. That said, simplicity and certainty are vital to the utility of any expanded definition of accredited investor, so any non-numerical criteria should generally be ascertainable with certainty.” (See this PubCo post.)

In a speech in August 2018, SEC Chair Jay Clayton discussed private capital-raising efforts, acknowledging that the current exemptive framework needed a comprehensive review “to ensure that the system, as a whole, is rational, accessible, and effective,” and indicated that the staff was working on a concept release that would attempt to harmonize the various exemptions. In that regard, he characterized the current framework as “an elaborate patchwork” that would not likely exist as it is if the SEC were starting with blank slate. In particular, he noted:

• “We should evaluate the level of complexity of our current exemptive framework for issuers and investors alike, and consider whether changes should be made to rationalize and streamline the framework.
• For example, do we have overlapping exemptions that create confusion for companies trying to navigate the most efficient path to raise capital?
• Are there gaps in our framework that impact the ability of small businesses to raise capital at key stages of their business cycle?
• “We also should consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.
• “And we should take a look at whether more can be done to allow issuers to transition from one exemption to another and, ultimately, to a registered IPO, without undue friction.”  (See this PubCo post.)

In a subsequent speech, Clayton noted that among the priority items on the 2019 agenda, Corp Fin was looking at harmonizing and streamlining the “patchwork” private offering system, including whether the accredited investor definition was still appropriate.  (See this PubCo post.)