SEC Director of Corporation Finance Talks About the JOBS Act and Accredited Investors

SEC Division of Corporation Finance Director Keith F. Higgins delivered remarks regarding the SEC's recent rulemakings and the impact on angel investors.

First, Director Higgins stated he is surprised the new Rule 506(c) ("Exemption for Limited Offers and Sales without Regard to Dollar Amount of Offering") exemption has not caught on more widely with "issuers who have long clamored for the general solicitation ban to be lifted." He wondered whether issuers' reluctance to use the new rule was their misinterpretation of the necessary "reasonable steps to verify" the accredited investor status of a purchaser, because some believe the rule would require purchasers to turn "over financially sensitive information, such as tax returns or brokerage statements, to the issuer for verification." Director Higgins stated that, in addition to a document-based verification, issuers could rely on a principles-based verification method in which the issuer would look at the particular facts and circumstances to determine the steps that would be reasonable to verify that someone is indeed an accredited investor.

Next, Director Higgins addressed the possibility that the SEC might change the Accredited Investor Definition. He explained that the SEC's focus is to determine whether or not the current net worth and income tests for a natural person still serve one of the key purposes of the accredited investor concept, which, the SEC defines as, "persons who can bear the economic risk of an investment in securities sold outside of the Securities Act registration process and can afford a complete loss of such investment if necessary." Director Higgins stated that the SEC is reviewing whether new criteria can serve either as an alternative or supplemental test for accredited investor status. The criteria could include:

• possession of professional certifications or degrees, such as a CFA, CPA, or a securities license, which may provide an individual with the knowledge and sophistication needed to be an accredited investor;
• ownership of a specific amount of investment securities, which may serve as a better measure of a person's ability to make informed decisions about whether or not to purchase securities; and
• reliance on intermediaries such as a registered broker or an investment adviser whose involvement could potentially enhance a person's ability to make an investment decision.

See:Director Higgins' Speech.
Related news:SEC Director of Corporation Finance Delivers Remarks on Capital Formation (March 20, 2014).
See generally: SEC Amends Private Placement Rules (accessible to Cabinet subscribers only).