I have been reading the Recommendation of the Investor as Purchaser Subcommittee and the Investor Education Subcommittee: Accredited Investor Definition carefully. There is a lot to digest in this report.
I am particularly struck by the below paragraph.
One thing that is evident is the degree to which the Commission is currently acting based on incomplete information when it comes to developing policy with regard to Rule 506 offerings, including with regard to the accredited investor definition. As the Commission noted in the release for the final rule lifting the ban on general solicitation in Rule 506 offerings, it has
“relatively little information on the types and number of investors in Rule 506 offerings.” This makes it difficult if not impossible for the Commission to reliably measure the likely impact of any changes to the accredited investor definition. This should not be seen as an excuse for inaction, however. Rather, the Commission should take immediate steps to collect the data that would allow it to better assess its policy options going forward.
The Committee goes on to make 5 specific recommendations. I listed them in my last blog post.
The Discussion At the Last Committee Hearing
At the last Investor Advisory Committee hearing, there was a good discussion of this point about not having enough information to make an informed decision. I transcribed a part of the last hearing on this point. Here is how it went:
Joseph V. Carcello had this to say:
Could I just make a broader general point that I think is important for the staff. You know, this is an area where there’s a surprising lack of even basic descriptive statistics. What, for example, is the, you know, distribution of the size of investments that are made by individuals into Reg. D private placements? What percentage of these investments come in from accredited investors? What percentage come in from unaccredited investors under 506 who are relying on purchaser representatives? What do we know in general about the risk and return profile of private placement investments? What percentage of them even return the initial investments? What’s the variance? How does that compare to the risk and return that you would get in a, you know, index fund or what have you? These are basic descriptive statistics about the market as a whole that to the best of my knowledge really are lacking. And it seems that if we want to do the best possible job for all participants in the process, for the companies that are offering securities pursuant to Reg. D, for the investors that are buying, and for the intermediaries in the market, it would behoove all of us to get some of this basic data. And the only way we’re going to be able to get it is unfortunately if the Commission rolls up its sleeves and does, you know, survey work in this area.
To this, Barbara Roper responded as follows:
Thanks, Joe. And I would just add there is—one of the points that we discuss in our draft recommendation is this notion that the Commission is operating to a large extent in the dark in developing policy in this area. There is, for example, an acknowledged problem that many Reg. D offerings do not file Form D. We don’t know how many. There’s, because of the way the regulations are written, even for those that do file the form, there isn’t a closing form. So there’s a lot you don’t know about what they actually raised, and what then happened with the offering. And so we anticipate that included in our recommendation would be a restatement of our previous recommendation that the Commission approve the changes to the Form D filing requirement that would allow it to collect additional information to assess some of these issues. That staff has done work, you know, if you read the economic analysis in the General Solicitation Final Rule—you know, they’ve reported what they know, based on the information that they get from the—you know, from the forms that are filed. And it’s useful. But it is, by definition, an incomplete data set, and we don’t even know how incomplete. And also arguably not representative, since those issues that actually take the step of file are presumably sort of different from those that don’t. So, I think, absolutely, I agree, Joe, that there is a useful place for more data in this and that, as you know, that will be reflected in the recommendation that comes from our subcommittee.
Then James Glassman, Executive Director of the George W. Bush Institute, at about the 1:04 mark, said this:
In your comments you alluded to the fact that there could be an economic effect if there was a straight inflationary increase in the limits. I like to just second what Joe said about the importance of research. It would be good to do some economic research on what would be the effects if we made any changes at all on the economy; I think there would be some economic effects. I just want to say I think that the SEC tries to be diligent in these efforts but in general frequently in the dark about economic effects. I think it is important for the SEC to look at those kind of things. Here is an perfect example where we can do research, not just in the areas that Joe talks about, but in broader economic terms. I think that should be a strong part of the recommendations; we shouldn’t make changes unless we know what the effects are going to be or get a pretty good estimate of what they are going to be.
I do not think the committee or anyone else should be revising or recommending revising the definition of “accredited investor” until the economic impacts are understood.
How Many Future Jobs Will Be Vaporized?
So, for example, if we simply adjust the financial thresholds for inflation, and 2/3rds of currently qualifying angel investors no longer qualify–how many jobs that would otherwise have been created will not be? Shouldn’t we get a reliable economic estimate before we proceed?