The Ban Has Lifted: Now is the Time to Change the Accredited-Investor Standard

Abstract

In July 2013, the United States Securities and Exchange Commission lifted an eighty-year ban on general solicitation and general advertising for certain private securities offerings. This was part of a mandate from the Jumpstart Our Business Startups Act (“JOBS Act”) in an effort to help small and emerging companies grow. Before, private companies had to rely on private connections or hire an investment bank with those connections in order to raise capital. Now, these companies may solicit or advertise securities through the mail, phone, and Internet, but only when they are selling to accredited investors. This new rule does not replace the old rule, which allowed a portion of the investors to be unaccredited. Rather, the new rule adds to the old rule. The problem with the current accredited-investor standard is that it considers only wealth in determining whether a person may invest. These exempted securities are typically high risk, and because the standard does not take into account investor sophistication or cap the investment amount, it is possible for unsophisticated, inexperienced investors to lose everything on one bad investment. Lifting the general advertising ban creates a risk of financial harm and fraud by allowing issuers to target unsophisticated investors who need protection, including the elderly. To ameliorate these potential harms, this Article proposes a new accredited-investor standard involving a mixture of wealth, financial sophistication, and diversification considerations. Additionally, companies should be required to disclose certain information, including the amount of risk and the fact that the securities are unregistered, before they solicit or sell their securities. Finally, investors should not be allowed to invest all of their income or net worth into one investment; rather, investors should only be allowed to invest a certain percentage to ensure that if the securities fail or are fraudulent, investors will not lose all of their wealth at once.