SEC commissioner Lee adds voice to Reg D reform chorus

Reg D reform, once consigned to bottom of SEC's to-do list, rockets to the top.

If the SEC is serious about protecting investors, it’ll raise income thresholds for accredited investors and peg them to inflation, Democratic commissioner Allison Herren Lee said.

In a virtual speech to state regulators for the Section 19(d) Conference, Lee, the longest-serving Democrat on the Commission, said that the number of accredited investors has risen 550 percent since 1983, even though actual wealth hasn’t kept pace.

“Indexing the accredited investor financial thresholds is a common sense step with an extremely broad base of support,” Lee said. “It also accords with the approach taken to other financial thresholds affecting the private markets and public companies, including offering limits on Regulation Crowdfunding and the emerging growth company definition.”

Reform rockets up list

Reg D offerings have exploded over the past decade. That’s largely thanks to the JOBS Act, which repealed the ban on general solicitation and also gave its blessing to crowdfunding websites.

US SEC Commissioner
Allison Herren Lee, SEC

Reg D reform was once consigned to the bottom of the SEC’s priorities. It has rocketed up the list in the past few months. Now that newly-installed chairman Gary Gensler has been sworn in, the issue of reform has gained steam.

On May 26, Gensler told a House Appropriations subcommittee that he has asked his staff to come up with recommendations for overhauling Form ADV, Form D and Form PF. “The SEC must grow and evolve with the industry,” he said, adding that he’s also weighing “other” private fund reforms.

Dissenting voices

The zeal for reform has some worried. Proponents say that Reg D is a careful balancing act between the need for small businesses to access capital and the need to protect ordinary investors.

Republican commissioner Hester Peirce, for instance, gave a speech to the SEC Small Business Capital Formation Advisory Committee in late April. She said that the definitions of accredited investors should expand.

“An entrepreneur who is plugged in to a network of financially sophisticated people should be able to go to those people for funding, even if they are not wealthy enough to meet our financial thresholds,” she said. “We need to open additional doors to accredited investor status, such as educational credentials.”

Changes coming

Ahead of last year’s elections, Lee and fellow Democratic commissioner Caroline Crenshaw issued joint statements. Reg D self-regulation, they said, had run its course. Now, they said, it was time for new rules – or an expansion of the old rules – to bring in some daylight upon the magic, they said.

In her May 21 speech, Lee said the once-forgotten 2013 rulemaking notice might make some important changes to the exempt reporting advisor industry.

Among the things that might help, she said, are requirements that would:

  • Require 506(c) companies to file a Form D. “Because there is no real consequence to issuers for failing to file this form,” Lee said, “the rule is viewed by many as optional. In fact, we don’t even know the actual rate of non-compliance, but our own research suggests it may be north of 10 percent.”
  • Require 506(c) companies file a Form D in advance of any sales and require 506(b) and 506(c) companies to file closing amendments.
  • Expand Form D. Collecting data on “the number and type of accredited investors,” the amounts raised from retail investors, “the nature of methods used to verify accredited” status, the issuer’s website, “control persons” and “the type of general solicitation…“will increase the flow of information to regulators and allow them to better evaluate market practices,” Lee said.
  • Requiring issuers to put legends on 506(c) general solicitations (and to file those legends with the Commission). “Requiring the filing of such materials would also allow regulators to better understand how 506(c) is being used and to evaluate the claims made in advertising materials,” Lee said.

This article first appeared in affiliate publication Regulatory Compliance Watch