Insights

23 January 2024

SEC Spotlights "Patchwork" Private Offering Rules for Overhaul

SEC Commissioner Mark Uyeda recently outlined his vision for rethinking private securities offerings to aid startups and retail investors. Governance, risk management, and compliance teams should note several dimensions covered that could reshape oversight duties.

Calls to Overhaul Patchwork $259 Billion Reg D Regime

The Commissioner argued that today’s framework covering capital raises like angel or seed funding rounds needs to be simplified. He cited how over 17,000 private offerings last year relied on Reg D’s predominant Rule 506(b) exemption to raise approximately “$259 billion”. Yet navigating the rules when other niche exemptions apply often baffles even expert counsel.

Uyeda contended, “… having choices is a good thing. However, even the most sophisticated securities lawyers often need a chart to track the different exemptions across the various factors.” Streamlining into tailored pathways for each fundraising scenario is essential.

Spotlights Harms of Limiting Younger/Diverse Investor Access

A key target lies in qualifying more nascent retail investors and founders. Yet some suggest tightening rules would “have profound negative implications,” Uyeda says.

“By making it more difficult for younger people to qualify as accredited investors, our rules may deny them opportunities to invest in private companies at an earlier age and build wealth” through startup growth, he warned.

Likewise, today’s accredited investor standards already disproportionately block capital access for diverse populations. “Entrepreneurs of color may not have adequate access to traditional financial systems, including bank loans, and they may not benefit from an existing network of accredited investors,” the Commissioner emphasized.

Floating Annual Investment Limits Based on Existing Holdings

To tackle such issues, Uyeda’s speech floated a “sliding scale approach” to let individuals invest limited sums yearly that are calibrated by their current securities portfolio size. For instance, those holding under $100k could put 5% toward private entities annually. This construes private deals as potentially beneficial portfolio diversification if approached carefully.

The proposal also keys eligibility to investment savvy indicators. “A person may have a high net worth or annual income but little to no experience investing in securities,” Uyeda explained. “He or she may, therefore, lack the ability to analyze the risks and rewards.”

GRC Pros Must Prepare for Exempt Offering Overhaul

With the SEC planning near-term amendments, governance teams should anticipate considerable impacts on investor qualification procedures, disclosure controls, and conflict risk assessments.

While debates continue balancing innovation versus protections, expanded retail access would alter oversight terrain. GRC professionals must watch for revised standards enabling broader startup participation.

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