Regulation by Exemption: The Changing Definition of an Accredited Investor

Abstract

The Securities and Exchange Commission ("SEC") has preserved its jurisdictional grip and ideological purity with respect to the regulation of initial public offerings and the regulation of mutual funds by creating huge exemptions from its regulatory scheme. While these exemptions have been in response to push backs against a rigid and complex framework for the registration of public offerings and the governance of mutual funds, it has led to anomalies in the capital markets, arguably not in the interests of the retail investors the SEC endeavors to protect. The SEC exemptions have been achieved through the use of the "accredited investor" concept, injected into the Securities Act of 1933 ("Securities Act") in 1980.

The problem with regulating by exemption is that it does not incentivize the SEC to adjust regulations that discourage capital market participants from entering a regulated system. Instead of reforming the registration provisions of the Securities Act to make such registration more user friendly and less likely to result in after-the-fact lawsuits, the SEC fashioned private placement exemptions that have created a huge market for unregistered offerings. Instead of trying to reform the Investment Company Act and the Advisers Act to accommodate hedge funds and private equity funds, the SEC exempted them for many years, and then, becoming worried that a large part of the capital market had moved beyond its jurisdiction, unsuccessfully tried to recapture jurisdiction over these investment pools.

Keywords: exemptions, initial public offerings, IPO, mutual funds, SEC