SEC exploring how to give more investors access to private placements

Agency seeks comment on easing limits on eligibility, investment amounts

Jun 18, 2019 @ 2:11 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is looking for ways to allow more investors to buy unregistered securities and enable emerging companies more easily to raise capital.

The agency issued a concept release Tuesday that examines ways to "simplify, harmonize and improve" regulations surrounding the sale of non-public investments, or private placements. For the most part, they are restricted to sophisticated investors who meet certain income and net worth thresholds.

Over the past several years, Congress has passed legislation, such as the Jumpstart Our Business Startups Act of 2012 and other measures, that have reformed SEC rules around when securities can be exempted from registration requirements.Congress has also considered updating the accredited investor standard.

The concept release indicates the SEC is poised to do more to ease restrictions on private placements, which often are riskier investments than public stock offerings. In 2018, approximately $2.9 trillion was raised in the private markets, compared with approximately $1.5 trillion on public exchanges, according to the SEC.

The agency will take comments on the concept release for 90 days following its publication in the Federal Register. After digesting the input, the SEC could proceed to writing a regulatory proposal.

The 211-page concept release covers the accredited investor definition, exemptions for so-called Regulation D, Regulation A and crowdfunding offerings, pooled investment funds and secondary trading.

"We also consider whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities," the release states. "For example, we explore whether we should revise our investor eligibility limitations to focus more particularly on the sophistication of the investor, the amount of the investment, or other criteria rather than just the income or the wealth of the individual investor."

Alternative investment advocates assert that such products diversify portfolios and offer investors a way to hedge against general market downturns. Investor advocates warn private placements can be highly risky and often harm investors.

SEC Chairman Jay Clayton has pushed to open private markets more widely to ordinary investors so that they can be in on the ground floor of the launch of breakthrough companies.

"We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States," Mr. Clayton said in a statement. "Input from startups, entrepreneurs and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today."

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