A Proposal for a Securities Offering Exemption That Eliminates Accredited Investor Distinctions

Last month, I submitted a comment to the Securities and Exchange Commission (SEC) about how to reform exemptions from the formal and detailed process a company must usually use to sell securities to the public. Selling securities is one of the main methods companies use to raise money to develop new products and expand manufacturing and production facilities. The rules for selling securities therefore have immediate effects on opportunities for start-ups, job creation, and economic growth.

The formal process for selling securities to the public has been criticized for being costly and burdensome. Various exemptions from that process exist, but they too have raised objections. For example, one exemption used to raise large amounts of capital divides investors into accredited and nonaccredited designations based partly on wealth and income, prompting the chairman of the SEC and others to worry that attractive early investments in innovative start-up companies are being denied to most individual investors. The SEC therefore invited comments on ways to improve the exemptions.

My comment proposes the elimination of the distinction between accredited and nonaccredited investors. A better approach would be to allow all investors to participate in certain of the exempt transactions as long as investors receive a disclosure document with essential information about the company and the securities. For the new approach to be successful, the disclosures need to be significantly reduced from and less costly than the disclosures required for other securities offerings.

The entire comment to the SEC may be found here, and a summary of the comment on the Columbia Law School Blue Sky Blog may be found here.

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