Speaking at a conference in Nashville, Chairman Clayton said that the SEC plans to issue a white paper and seek public comment on how best to revamp the capital-raising process. According to Clayton, this could include liberalizing the “accredited investor” standard that currently locks millions of middle-class Americans out of some of the most lucrative investment opportunities.
The accredited investor standard is a stringent income and net-worth requirement for participating in more lightly regulated investment opportunities known as private offerings. The current standard involves only individuals who earn over $200,000, households that collectively earn over $300,000, or those that have a net worth, excluding value of primary residence, of over $1 million. This means that only the top 6 percent of Americans, at best, are able to invest in such exciting new enterprises as Uber and Airbnb, which have avoided “going public” in recent years.
As my colleague John Berlau pointed out earlier this week in a column for Forbes.com, the problem is compounded by the fact that number of public companies on U.S. exchanges is at its lowest point in nearly 50 years. According to a 2014 study by the SEC, less than 0.03 percent of the estimated 28 million firms in the U.S. were currently public firms. As Berlau points out, the culprit for such stagnation in public offerings is the massive uptick in regulation, making the cost of going, and staying, public nowadays simply not worth it. This is especially the case for a company that is only looking to raise a few million dollars. Satisfying the onerous disclosure requirements of the SEC and accounting requirements imposed by the Sarbanes-Oxley Act, which quadrupled auditing costs, run well over millions of dollars and can take months to complete.
The rationale for this regulation, of course, is that it is needed to protect middle-class investors, as only the wealthy are able to “fend for themselves” in the private markets. In effect, however, the government has merely created special investment privileges for the very richest in society, denying wealth-building opportunities to the working and middle-class.
In reforming the accredited investor standard, the SEC could simply lower the income or wealth thresholds or recognize professional licenses or advanced education as a satisfactory qualification for investing in private markets. However, in its efforts to reform the current system, the SEC should be steer clear of adding new “investor protection” regulations to the more liberalized private markets, which would largely defeat the purpose of an otherwise exciting step forward.