Abandon the Concept of Accredited Investors in Private Securities Offerings

Abstract

Accredited investors as defined in the Securities and Exchange Commission’s Regulation D occupy a favored spot in the world of federal securities law and may participate in investment opportunities not available to other investors. The Securities and Exchange Commission (SEC) views accredited investors as sophisticated and able to fend for themselves in making securities investments without the need for the main disclosure protections in the Securities Act.

Closer consideration of the accredited investor category raises questions about its continued vitality. It provides some benefits, but reasons for dispensing with the line between accredited and non-accredited investors are extremely strong. In particular, the SEC’s rationale for the category is deeply flawed, and many of the components of the category fail to effectuate even the flawed rationale.

A better regulatory approach would be to get rid of the category and rely on a short set of mandatory disclosures. This would guarantee the supply of essential information rather than depend on the voluntary choices of issuers and speculative assumptions about investor sophistication and access to information. It would also have several other advantages and would not add significant costs because issuers overwhelmingly already prepare and provide disclosure to accredited investors.

Keywords: private offerings, accredited investors, disclosure, Rule 506, mandatory disclosure, exemption

JEL Classification: K22