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Entrepreneurs considering raising money by selling stock to individual investors should get moving before regulators step in and make the process more difficult.
That’s the take of Jeremy Hill, who chairs the emerging business group at law firm Bingham McHale. Within two years, quite possibly sooner, the government’s definition of an “accredited investor” is likely to be further tightened, shrinking the pool of people who can invest without the need for expensive documents designed for unsophisticated investors.
Accredited investors are considered to have enough sophistication to not need thickly detailed disclosures.
The Wall Street Reform and Consumer Protection Act, otherwise known as the bank reform bill, eliminated the value of an investor’s house from the equation, meaning an investor has to have a net worth of $1 million without counting their primary residence.
Left untouched in the July 21 legislation was the net-income threshold—$200,000 a year for individuals and $300,000 for an individual and their spouse—in each of the past two years.
As it puts the bill into effect, the Securities and Exchange Commission will probably increase the net-income requirement, Hill says.
Hill believes the stripping of primary residences from the net-worth test was a shot across the bow that too many people were being allowed to make investments with too little sophistication.
“This is clearly the first of things to come,” he says.
Hill thinks the reforms are overdue. While the real estate collapse for now has tempered the practical results of the net-worth test, many people had seen values of their properties rise so high that they suddenly could pass for accredited investors. Too many were anything but sophisticated, he says.
Hill thinks the income threshold should be increased by about 50 percent.
New regulations could arrive in a few months, he believes.
What are your feelings about raising the standards? Were they too low?
Any other thoughts about bank reform?