Securities and Exchange Commission Rule Change Would Devastate Small Business

February 18, 2014

The U.S. Securities and Exchange Commission (SEC) is considering a rule that would reduce the number of small business and start-up investors by 60 to 70 percent by increasing the income and net worth thresholds for "accredited investors" found in what is known as Regulation D. Regulation D was a rule adopted by the SEC in 1982, allowing companies to raise unlimited money and sell securities to accredited investors (persons with an income or net worth above a respective $200,000 or $1 million, or financial institutions), says David R. Burton, a senior fellow in economic policy at the Heritage Foundation.

  • Companies that comply with Regulation D are not subject to Securities Act registration requirements.
  • Regulation D is responsible for $900 billion in new investment every year. This rule change would have a massive negative impact on the economy. In 2012, companies under Regulation D raised more than three times as much capital as through public sales of equity.
  • This regulation is the primary way that new start-ups raise capital.

But the Dodd-Frank bill required the Government Accountability Office (GAO) to study Regulation D's accredited investor thresholds. When the SEC issued proposals to change some Regulation D rules in July of last year, the agency also requested comments on changing the definition of accredited investor.

Organizations in favor of more regulations jumped at the opportunity to support increasing the accredited investor thresholds. However, the current thresholds have not posed any problems, and those who want to increase them have provided no evidence as to why the current thresholds are insufficient.

  • Some have claimed that the thresholds should be changed to combat fraud, but there is no evidence that fraud is any more common in Regulation D than elsewhere.
  • Moreover, there is no evidence that changing the investor thresholds would be able to do anything to affect the level of fraud.

Entrepreneurs would struggle to launch new businesses if the thresholds are changed, and small firms would have difficulty growing and creating jobs.

  • The GAO estimated that increasing the net worth thresholds would reduce the number of potential investors down from 8.5 million to 3.4 million.
  • Reducing the income thresholds would reduce the investor pool from 6.1 million to 1.7 million.

Without equity investment, young, dynamic companies will not have the funds to start their businesses or to grow. In fact, it is these companies that create all or nearly all new jobs.

Source: David R. Burton, "Don't Crush the Ability of Entrepreneurs and Small Businesses to Raise Capital," Heritage Foundation, February 5, 2014.

 

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