In our previous blog post Raising Capital Through Exempt Offerings, we talked about some of the most commonly used exemptions for securities offerings. Of note, we mentioned that Rule 506 promulgated under Regulation D is the most widely used transactional exemption for securities offerings, used in more than 90% of all exempt offerings in the United States. To understand how exemptions under Regulation D work, it is important to understand the concept of “accredited investor,” as it is often embedded in the conditions of such exemptions. “Accredited investor” includes certain institutional buyers (e.g., banks), certain insiders (e.g., director, executive officer, or general partner of the issuer), and any person whose individual net worth is over $1,000,000 (excluding their primary residence) or who had an individual income over $200,000 (or joint income in excess of $300,000 with his or her spouse) in the two most recent years, among others. In other words, these are purchasers who, by virtue of their wealth, are presumed to have the ability to fend for themselves. The SEC estimates that at least 8.7 million U.S. households, or 7.4% of all households, qualified as accredited investors in 2010, based on the current definition.
On July 20, 2016, the Securities and Exchange Commission’s (“SEC”) Advisory Committee on Small and Emerging Companies (the “Committee”) submitted recommendations regarding capital raising by emerging small businesses to the SEC. The Committee noted that in 2015, issuers utilizing Regulation D raised over $1.35 trillion, an amount comparable to what was raised in registered offerings. At the same time, the Committee expressed concerns that raising the individual income and net worth thresholds in the definition of accredited investor would considerably decrease the number of households that qualify as accredited investors, which the Committee says would have a disparate impact on those areas with lower venture capital activity, women, and minority entrepreneurs, among others. Instead, the Committee recommended that the SEC expand the pool of accredited investors to include individuals who have passed certain examinations in the areas of securities and investing, such as certified financial analysts (CFAs), as well as those with specific industry or issuer knowledge who would not otherwise be considered accredited investors. In doing so, the Committee recommended that the SEC take into account measures of non-financial sophistication, regardless of income or net worth, while keeping the current financial thresholds in the definition except to adjust on a going-forwarded basis to reflect inflation.
This post is part of a multi-post series on efforts to expand the definition of accredited investor. In our next post, we will look at the SEC’s own report on this topic.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
 Robert Robins, Practical Implications of the JOBS Act Changes to Private Placements: Rule 506(c), Crowdfunding, and Reg A+, http://www.pillsburylaw.com/siteFiles/Publications/WhitePaperOct2014CorporateandSecuritiesPracticalImplicationsoftheJOBSActChanges.pdf (last visited Aug. 3, 2016) (internal citation omitted).
 17 C.F.R. § 230.501(a).
 78 Fed. Reg. 44,793 (July 24, 2013).
 See generally SEC Advisory Comm. on Small and Emerging Cos., Recommendations Regarding the Accredited Investor Definition (July 20, 2016), https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf. Unless otherwise specified, all references to the committee recommendations are to this citation.