One of the provisions of the JOBS Act that has many in the investment community excited is the new crowdfunding exemption to the registration requirements. When effective, these offerings will permit sales of securities to anyone – not just accredited investors – for up to $1 million in the aggregate in each 12 month period. This represents a radical democratization of private offerings, which currently are, for the most part, marketed just to the wealthy. The SEC, however, does not share the private sector’s enthusiasm and has seemingly been slow-walking its efforts to enact rules that are required before these offerings can be introduced.
The SEC’s apparent reluctance is, many believe, based on a philosophical resistance to permitting non-wealthy investors to invest in the securities of private companies. Under this view, ordinary investors are prime game for fraudsters who will take their money and run. I believe that the law, together with the forthcoming SEC rules, will provide adequate investor protection. Among other provisions, investors with relatively low income and net worth will have their investments in all of these offerings in any year capped at $2,000 or 5% of income or net worth (whichever is greater), which limits the possibility of a nest egg being completely wiped out.
But what I’d like to address here is the SEC’s long-standing assumption that accredited investor status is useful in determining which investors are worthy of heightened protection. The most susceptible to fraud, I think, are those who have suddenly come into a lot of money without any sort of business or financial background. Put another way, if I was looking to fleece investors, I’d be going after the professional athlete who just signed his first big contract (an accredited investor), not someone who earns $60,000 a year working in accounts payable (not an accredited investor). Aside from being an inaccurate proxy for sophistication, the SEC’s attitude is paternalistic and shuts out the majority of Americans from making small and manageable equity investments and potentially benefiting from the upside like the wealthy.
