The SEC has published a Concept Release on the Harmonization of Securities Offering Exemptions. The SEC summarizes the reason for this move as follows:
Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration [of offerings with the SEC] have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. We believe our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, we also believe that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities. Therefore, we seek comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.
Sounds pretty innocuous, and a little nerdy, right? And to be sure, some of the questions raised by the SEC are pretty arcane for outsiders. We will be definitely weighing in on whether displayed QR codes are an acceptable update to the “delivery by clickable direct link” principle set out by the SEC Staff in 1995 (spoiler alert: they are).
But while some of the 138 questions raised can be addressed by discrete rulemaking, there’s a broader issue here, and one that has significant societal implications. The Fed’s numbers on household wealth show, in effect, that the rich get richer and the “bottom 50%” get nothing. The “top 1%” have more than recovered their wealth since the Great Recession, while the poor and middle class are poorer than they were in 2007. Investment in the stock market is one of the two primary methods of wealth building for US households (the other being real estate).
While Presidential candidates are discussing wealth inequality, the SEC hasn’t generally been part of that debate. Solving inequality is not part of the SEC’s mission. But changes made to the offering exemptions may impact inequality. Let’s look at just one possible scenario. Lots of industry participants advocate the expansion of the definition of “accredited investors” who can participate in Regulation D offerings. The definition is currently primarily based on financial measures – wealth and income. It makes a lot of sense to permit people who are sophisticated in financial matters (such as SEC staffers) who are younger, maybe not so rich, but equally able to decide for themselves whether to make an informed investment decision on the basis of whatever information is provided. However, what if a large proportion of the people who currently invest online in Regulation A and Regulation CF offerings fall into the “new accredited” bucket (which they might)? Will companies then abandon those types of offerings for Regulation D offerings, which are not available to the “bottom 50%”? If the SEC makes changes that effectively increase the size of the private markets, already bigger than the public markets, does that matter? Would such changes increase wealth inequality? Is that even something the SEC should be taking into account?
There are clearly going to be some significant issues involved in looking at exempt offerings as a whole, and we should expect participation in this debate from a broader range of commentators than the usual securities nerds, including those concerned about wealth inequality.