Re:SEC due to review the definition of accredited investor
by _delirium on Monday July 07, 2014 @05:04PM
(#8001404)
Publicly traded stocks comply with SEC regulations, which have a lot of provisions about properly informing the public, reporting on material events, etc. There's no ban on the general public making private equity investments either, if the company is willing to register the offering with the SEC and comply with similar requirements.
What's at issue here is just an exemption from those requirements. If you have relatively few investors and they are all deemed to be sophisticated investors, Congress has decided that you can waive the usual investor-protection rules, cut out the SEC's involvement, and negotiate your own conditions directly with the investors. The rationale is that if you have relatively few and presumed-to-be-professional investors, those investors know how to negotiate appropriate conditions on their own, rather than relying on SEC protection, so are allowed to do so. Sophisticated investors often have a "term sheet" they offer (vetted by their lawyer), or else have a lawyer on retainer to negotiate terms with you individually. If you're offering an investment to the general public, on the other hand, the assumption is that they probably don't have a term sheet handy or a lawyer on retainer, or really any knowledge about this whole sector at all. So in that case you need to comply with the regular disclosure and investor-protection rules. But you aren't banned from taking on non-accredited investors, as long as you're willing to comply with standard SEC terms.
The practical problem is that registering your offering with the SEC and complying with the disclosure requirements has pretty high fixed costs, so is often considered prohibitive for small companies. Therefore there's kind of a rule of thumb that you should avoid non-accredited investors in order to fit in the exemption, at least until you grow bigger, which is where I think the myth that you literally can't take non-accredited investors originates. (My own preferred solution to that would be to streamline the system to reduce cost of compliance for small companies, rather than expanding the definition of what constitutes a sophisticated investor.)
What's at issue here is just an exemption from those requirements. If you have relatively few investors and they are all deemed to be sophisticated investors, Congress has decided that you can waive the usual investor-protection rules, cut out the SEC's involvement, and negotiate your own conditions directly with the investors. The rationale is that if you have relatively few and presumed-to-be-professional investors, those investors know how to negotiate appropriate conditions on their own, rather than relying on SEC protection, so are allowed to do so. Sophisticated investors often have a "term sheet" they offer (vetted by their lawyer), or else have a lawyer on retainer to negotiate terms with you individually. If you're offering an investment to the general public, on the other hand, the assumption is that they probably don't have a term sheet handy or a lawyer on retainer, or really any knowledge about this whole sector at all. So in that case you need to comply with the regular disclosure and investor-protection rules. But you aren't banned from taking on non-accredited investors, as long as you're willing to comply with standard SEC terms.
The practical problem is that registering your offering with the SEC and complying with the disclosure requirements has pretty high fixed costs, so is often considered prohibitive for small companies. Therefore there's kind of a rule of thumb that you should avoid non-accredited investors in order to fit in the exemption, at least until you grow bigger, which is where I think the myth that you literally can't take non-accredited investors originates. (My own preferred solution to that would be to streamline the system to reduce cost of compliance for small companies, rather than expanding the definition of what constitutes a sophisticated investor.)