On November 2nd the SEC simplified rules governing private investment offerings under the Securities Act in an attempt to make it easier for investors to enter private markets while retaining safeguards. As any private equity, venture capital or similar firm well-knows – the numerous rules defining an “accredited investor” can frustrate efforts to broaden the marketing reach of funds and related private investments.
These changes allow issuers to move from reliance on one private offering exemption to another, increase offering limits for investments covered under certain exemptions, harmonize disclosure and eligibility requirements while reducing offering costs and concerns over integration with other exemptions. The big question remains – will these changes indeed enable fund managers to add another investor tier to the strong growth they have realized over recent years?
First, a quick synopsis of the changes. They increase the maximum offering amount under Tier 2 of Regulation A (known as Reg A+) from $50 million to $75 million and raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15m to $22.5m. The offering limit in Regulation Crowdfunding increases from $1.07 million to $5 million and removes the investment limits for accredited investors. Non-accredited investors may now use the greater of their annual income or net worth when calculating investment limits, allowing them greater freedom to invest.
Other significant changes include:
- Raising the maximum offering amount from $5m to $10m for private offerings under Rule 504 of Regulation D of the Securities Act
- Easing disclosure under Rule 506(b) for non-accredited investors
- Easing investor verification under Rule 506(c)
- Affirmation of directed selling efforts under Regulation S
- Several “progressive integration” changes
Taken together, these changes serve to lower the strictures on lower net-worth investors gaining access to alternatives. There are obstacles remaining however. Newer, smaller managers tend to opt for the exemption rules requiring investors in the fund be accredited investors (net worth of $1 million or greater) and allowing up to 100 investors to participate versus “option 2” — requiring investors to be qualified purchasers ($5 million in net worth or greater) and allowing up to 2,000 investors to participate.
New/small managers must usually choose option 1 while larger, established managers with a strong track record tend to go with option 2. The larger, well-known managers focus on the institutional market – and accredited investors get shut out as a result. Also, performance fees add to the “hurdle”: and accredited investor must also be a qualified client which usually requires a $2.1m net worth instead of the $1m!
These challenges notwithstanding, P/E, real estate, VC and other alternative managers now have a new opportunity to market to a broader market. Operationally, are you ready with the best tools to reach them and then communicate once they become clients? Vantage stands ready with deal flow management, marketing and investor servicing tools that will help you win in this expanding market!