Guest post by Alexandra M. Fenno , Lauren C. Jackson , John I. Sanders , Jeffrey T. Skinner from Kilpatrick Townsend & Stockton LLP
On June 18th, the SEC issued a concept release (the “Concept Release”) seeking public comment on ways to simplify, harmonize, and improve the rules related to private securities offerings.[i] The Concept Release contains several elements, three of which suggest that the SEC may take action that would benefit private investment funds:
- The SEC is asking whether the limitations on who can invest in private securities offerings are appropriate, and whether they pose an undue obstacle to capital formation and investor access.[ii] We believe that the SEC is likely to receive comments advocating for an expansion of the definition of an “accredited investor” that includes persons with academic or professional experiences related to business, finance, and investment management.[iii] This kind of qualification is incorporated into private investment eligibility standards in other jurisdictions (e.g., several countries in the European Union), and may be viewed favorably by the SEC as an approach that supports capital formation without compromising investor protection.
- The SEC is asking whether investors should have greater access to private investment funds regardless of whether there is a change to the definition of an “accredited investor.”[iv] We believe that the SEC is likely to receive comments advocating lower eligibility standards for investing in private investment funds, as opposed to private securities offerings made by operating companies. The SEC may adopt this position, reasoning that investments in funds are less risky to investors than single company private equity investments because they are, by their very nature, diversified.
- The SEC is asking whether it should revise its rules governing exemptions for resale of securities issued through private securities offerings to facilitate capital formation and promote investor protection through improved liquidity.[v] We believe that the SEC is likely to receive many comments supporting liberalization of the exemptions for resales of private securities, and that the SEC is likely to respond positively to those comments. To the extent resale rules are liberalized, investors in venture capital, private equity, and other closed-end funds would be the greatest beneficiaries of the increased liquidity.
The SEC will accept public comments on the issues presented in the Concept Release for 90 days after the Concept Release is published in the Federal Register. After the comment period closes and the SEC has considered the public comments, the SEC is likely to propose a rule targeting the issues in the Concept Release.
If you have any questions about the Concept Release or about the rules related to private securities offerings, please feel free to contact us.
By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton
[i] SEC, Concept Release on Harmonization of Securities Offering Exemptions, available at https://www.sec.gov/news/press-release/2019-97 (hereinafter, “Concept Release”).
[ii] Id. at 7.
[iii] A bill (H.R. 1585 – Fair Investment Opportunities for Professional Experts Act) that would have the effect of amending the definition of an “accredited investor” passed the United States House of Representatives in November 2017 with bipartisan support. It has been referred to the Committee on Banking, Housing, and Urban Affairs in the Senate, which has conducted hearings.
[iv] Concept Release at 32.
[v] Id. at 193.
Shifting investment patterns, increased regulations, and emerging technologies are expected to significantly impact the investment management and broker-dealer industries in the coming years. To effectively navigate these changes, Kilpatrick Townsend’s Investment Management & Broker-Dealer Blog provides straightforward news summaries of some of the most significant and up-to-date investment management-related legal and regulatory developments to assist our investment management clients.