February 10, 2014
I would greatly appreciate if you would please consider my comments despite the passage of the due date. My comments specifically address the definition of "accredited investor," which will be dealt with subsequent to the formalization of the Regulation D Amendments.
The net worth and income tests included in the Securities Act of 1933 were intended to protect unsophisticated investors from complex and potentially risky investments. Unfortunately, the actual effect of these tests is to limits access to investment vehicles, with returns characteristics that are often superior to the public markets, to those who are already wealthy. In addition, it has the adverse effect of limiting capital formation for emerging businesses--an effect that was only partially mitigated by the JOBS Act. I share the SEC's concern with protecting investors from unsuitable investment products, however, I believe that this objective can still be satisfied while providing a mechanism for sophisticated investors, who would not qualify under the current income and net worth tests, to qualify as "accredited."
The academic literature contains conflicting data on the performance of private equity, as an asset class, relative to public equity. However, the most recent analysis, based on what its authors argue is a more comprehensive data set than has been previously available to researchers, determined that private equity performance "consistently exceeded public markets" and has outperformed the S+P 500 by an average of 3% annually (1). While venture capital returns, specifically, have been less consistent over time, investment in early stage businesses creates jobs a 2011 report by IHS Global Insight and the National Venture Capital Association found that companies, which at one point were venture-backed, were responsible for more 11% of total private sector employment and 10% of total US Sales in 2010 (2). Opening up private equity, venture capital, and other alternative investments, to sophisticated investors who are excluded solely on the basis of their net worth or income, both provides those investors with attractive new investment opportunities and encourages increased business formation and growth.
Reserving an attractive class of investment opportunities for those who are already wealthy helps exacerbate wealth inequality and limits upward economic mobility. Data on net worth by age of head of household shows that the current rule also functions as a form of unintentional age discrimination. Both net worth and income tend to increase with age. According to 2011 data presented on Census.gov, only 2% of US households with a head of household under 35 years of age have a net worth in excess of $500,000 (3), while the GAO estimates that 8.5 million households, in total (4) (out of 115 million in the US (5)), would qualify under the current net worth criteria of $1 million excluding the household's primary residence.
By applying a "sophistication test," the investor protections of the Securities Act can be preserved while democratizing access to private placements. Democratizing access to private investment opportunities benefits investors by providing a wider range of investment opportunities to them. This would aid company executives, who will see more competition among investors to invest in their companies, and investment managers, who can solicit a wider pool of investors. In addition, it will promote new business formation and growth.
As a 31 year old former investment professional with two institutional venture capital firms, consultant to an angel investment partnership, and a financial technology startup founder and CEO, I would almost certainly quality as a sophisticated person with respect to securities transactions. However, I am unnecessarily precluded from investing my own capital in private placements because of the net worth and income requirements under the current accredited investor rule. I hope that the SEC will consider the perspective of investors such as myself when it discusses modifications to the accredited investor criteria in 2014, and will recommend the adoption of a "sophistication test" that can allow less wealthy individuals to invest in private placements.
(1) Harris, Robert S. and Jenkinson, Tim and Kaplan, Steven N., Private Equity Performance: What Do We Know? (July 2013). Journal of Finance, Forthcoming Fama-Miller Working Paper Chicago Booth Research Paper No. 11-44 Darden Business School Working Paper No. 1932316. Available at SSRN: http://ssrn.com/abstract=1932316. or http://dx.doi.org/10.2139/ssrn.1932316