Into the Greater Unknown: New Frontiers in Early Investment Pose Risks
Welcome to the December 2019 edition of our newsletter! In this issue, we’ll examine the SEC’s continued push to grant certain groups other than accredited investors greater access to private companies and the risks that remain.
Early Stage Investing Gets a Boost from New SEC Rule: What to Know
In recent months, the SEC has been finalizing proposals that would increase the ability of investors to access private securities offerings and certain hedge funds beyond the existing definition of “accredited investors” – those with at least $1 million in assets and $200,000 in annual income. A proposal recently approved by the commission would broaden that group to include persons who recently obtained entry-level securities registrations, including completion of Series 7 or Series 65 exams. The proposal also left the thresholds for accredited investors as not adjusted for inflation, which makes it likely that more people will qualify over time, while also allowing spouses to jointly state their assets when qualifying as an accredited investor. The rule will also lower the threshold for certain other groups to qualify as accredited investors, including “limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs.)”
The upside of greater access to early-stage companies, especially in dynamic technology categories, remains as obvious as it was months ago when the SEC first proposed this rule. Yet so do the risks, as we’ve seen with “unicorns” which had planned public offerings that failed to come to fruition. The proposed rule is currently open to a 60-day public comment period, and left unclear – from public statements, at least – is whether newly-minted brokers will be able to invest in the offerings only for themselves, or for clients, and if the latter whether any further requirements or limits will be imposed. The recent failure of various tech “unicorns” should be a cautionary tale in granting greater access to markets, emphasizing that vetting processes and understanding of risks involved must be an equal part of the rule’s implementation.