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The Presumed Sophistication of Accredited Investors

May 10, 2018 By Andrew Abramowitz Leave a Comment

The Presumed Sophistication of Accredited InvestorsA recent Wall Street Journal article highlighted how sketchy brokers have been marketing problematic private placements to accredited investors. While the article focused on the brokers, I was struck by the identity of one of the investor victims noted in the article as having lost a lot of money: George Stephanopoulos, the ABC News anchor and former Clinton Administration official. I don’t mean to cause Mr. Stephanopoulos any further embarrassment by highlighting this here (though I’m guessing that the readership of my blog is far less than that of the Journal), but the fact that he was scammed is a useful illustration of the misguidedness of the accredited investor definition and associated rules.

The current definition of “accredited investor” under SEC rules essentially uses wealth as a proxy for sophistication, as an individual can qualify by either having an annual income of $200,000 or a net worth of $1 million not including the value of one’s primary residence. An offering made to all accredited investors does not have an information requirement, meaning the investors do not need to be provided with a similar level of disclosure that would be associated with a registered public offering.

[Read more…]

Related posts:

  1. Links to Some of My Greatest Hits
  2. The Latest on Possible Tweaks to the Accredited Investor Definition
  3. SEC Advisory Committee Report on Accredited Investor Definition

Filed Under: Crowdfunding, Financing Transactions/Securities Offerings, General/Miscellaneous, SEC Disclosure Matters

Simultaneous Regulation CF and Rule 506(c) Offerings

April 12, 2018 By Andrew Abramowitz Leave a Comment

Simultaneous Regulation CF and Rule 506(c) OfferingsBack when the equity crowdfunding rules were proposed following passage of the JOBS Act, the $1 million offering limit per year for what are now known as Regulation CF offerings was viewed as making this procedure impractical. The amount raised would not be sufficient in light of the legal, accounting and other costs needed to prepare for the offering. However, as crowdfunding is now a reality and companies are giving it a shot, a fix to the dollar limit has evolved: raise funds not just under Regulation CF, but under other exemptions that are not subject to that dollar limit.

[Read more…]

Related posts:

  1. Use of General Solicitation and Advertising in Rule 506 Offerings
  2. Regulation A+ – How It Fits Into the System
  3. Reluctance to Engage in Accredited Investor Verification

Filed Under: Crowdfunding, Financing Transactions/Securities Offerings

Secondary Market Trading by Private Companies

February 23, 2018 By Andrew Abramowitz Leave a Comment

Secondary Market Trading by Private CompaniesMatt Levine, writing in Bloomberg View, makes a good point about Spotify’s reported direct listing plan: When Spotify flips the switch, and trading of its shares on a public stock exchange commences, that won’t be the first time Spotify shares have traded hands. Like other large private companies that have been around a while, some of its early investors and employees have had the opportunity to sell some of their shares to existing or new stockholders, either in purely private transactions or ones facilitated by service providers that specialize in secondary market transactions. These private transactions help to establish a valuation for the company and ensure that, when public trading commences, investors won’t be flying completely blind in determining what the price should be in the absence of an initial price set by an IPO.

[Read more…]

Related posts:

  1. Spotify’s Possible Direct Listing
  2. Going Public by Direct Listing
  3. At-the-Market (ATM) Offerings

Filed Under: Financing Transactions/Securities Offerings

Spotify’s Possible Direct Listing

January 5, 2018 By Andrew Abramowitz Leave a Comment

Spotify's Possible Direct Listing | Andrew Abramowitz, PLLCThe political website Axios, not known, at least to me, as a source of breaking business news, reports that the music streaming service Spotify has filed papers with the SEC on a confidential basis to go public via direct listing. [Read more…]

Related posts:

  1. Secondary Market Trading by Private Companies
  2. Going Public by Direct Listing
  3. Share Transfer Provisions for Startups

Filed Under: Financing Transactions/Securities Offerings

A Possible Change to the “Accredited Investor” Definition

November 20, 2017 By Andrew Abramowitz Leave a Comment

Accredited InvestorSecurities offerings that are exempt from the SEC’s registration requirements often hinge on whether some or all of the investors are “accredited investors.” There are various categories of accredited investors for business entities, but for individuals, the categories relate to the investor’s annual income, net worth or whether the individual is a director or executive officer of the issuer.

The underlying policy of the current definition of accredited investors is that rich people (a term not used in the actual rules, obviously) can be assumed to have a level of financial sophistication such that they would conduct adequate due diligence before making an investment. Accordingly, accredited investors require less disclosure about proposed securities offerings. This assumption is, shall we say, not attuned to human reality. The obvious group of accredited investors that are not necessarily sophisticated is heirs and spouses of wealthy business people, who may have no background at all in finance and investment matters. But even for those accredited investors who have directly earned the money that grants them that status, plenty are in fields such as sports and entertainment where the particular skill that is remunerative to them has nothing to do with investing. Additionally, many white collar professionals such as doctors, engineers and even some attorneys may be highly educated, but they are not able to make heads or tails of a balance sheet and income statement. [Read more…]

Related posts:

  1. The Latest on Possible Tweaks to the Accredited Investor Definition
  2. Reluctance to Engage in Accredited Investor Verification
  3. SEC Advisory Committee Report on Accredited Investor Definition

Filed Under: Financing Transactions/Securities Offerings, SEC Disclosure Matters

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"Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said every investor should approach a private placement skeptically." -- Paul Sullivan (New York Times)

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"If the goal [...] is to protect people from losing all of their money in an illiquid investment, the current standard fails on that count, too. Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said a better standard might be to limit how much of their net worth people can invest." -- Paul Sullivan (New York Times)

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