On February 6, 2018, SEC Commissioner Michael Piwowar spoke at the University of Richmond School of Businessas part of its Robins Executive Speaker Series. Commissioner Piwowar spoke for a short time about the SEC and the US Capital Markets in general before taking questions from the audience. While his prepared remarks on the U.S. Capital Markets and the SEC’s role in those markets were insightful, the most valuable discussion came during the question and answer portion of the evening. The commissioner fielded questions on a variety of topics, but most of these topics can be distilled into two categories: changes in the regulatory regime and efforts in capital formation, including his opinion on accredited investor rules.
Changes in the Regulatory Regime
As Commissioner Piwowar reminded the audience, the SEC has a three-fold mission: Protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Balancing all of these goals, particularly the goal of protecting investors and the separate goal of facilitating capital formation, requires some degree of juggling on the part of the Commission. In an ideal world, the SEC would pursue the middle goal of maintaining fair, orderly, and efficient markets, which would accomplish the other two, but we don’t live in an ideal world. As a result, the SEC tends to focus more on either capital formation or increasing investor protection depending on a whole host of factors, including which political party is in the White House, how the markets are performing, and incidence of high profile frauds.
Commissioner Piwowar highlighted this change in both his prepared comments and in response to questions from the crowd. For example, a question was asked by an attendee about whether the “Broken Window” approach to securities enforcement was done for good. This was in reference to the approach the previous SEC Chairperson Mary Jo White advocated during her tenure. The “Broken Window” theory says that an enforcement agency should police all violations of the law, or regulations, no matter how big or small. Commissioner Piwowar has opposed this theory during his tenure on the SEC and made clear that he hopes the commission has moved on from that approach for good. In his view, this policy caused the cost of compliance for industry participants to skyrocket and actually led to a less compliant, and far less efficient, market due to companies viewing compliance violations, and their associated fines, as a cost of doing business.
Another example that Commissioner Piwowar highlighted was the shift away from focusing on implementing the requirements in Dodd-Frank toward reacting to the changing markets. An example of this would be the SEC’s relatively quick reaction to the rise of Initial Coin Offerings. Like many of his fellow commissioners, including Chairman Clayton, Commissioner Piwowar voiced his concerns about this product and made it crystal clear that the SEC considers ICO tokens to be a security. As he pointed out, this means there are only two ways a company can sell an ICO token; either by registering the security with the SEC or by selling it under a valid exemption from registration, likely either Regulation D or Regulation A. He made it very clear that the SEC is taking the unregistered sale of ICO tokens as serious violations of the U.S. Securities Laws. In particular, he highlighted the SEC’s recent actions against ICO issuers for unregistered broker-dealer activity and indicated the Commission will additionally target Registered Investment Advisors, unregistered exchanges, and broker-dealers who are active in this space.
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Efforts in Capital Formation
According to Commissioner Piwowar, under the new administration, the SEC shifted its focus to capital formation. During both his prepared comments and during the Q&A, Commissioner Piwowar drew attention to various ways the SEC is promoting capital formation. For example, the SEC piloted a program in the last year expanding pre-IPO confidential filings to more than just emerging growth companies. According to the Commissioner, 80 biotech companies immediately took advantage of this change. He used this example to show how a minor change, in this case simply expanding an existing program, encourages companies to enter into the U.S. public markets.
One question from the audience focused on an issue that WealthForge follows very closely: changes to the definition of accredited investor. Accreditation status is required for investors who wish to invest in alternative investments such as Regulation D, 506(c) offerings. When asked about the idea of allowing individuals to take a test to become accredited investors, Commissioner Piwowar voiced support in general before stating his personal opinion that the accredited investor definition should be done away with. Because we work with accredited investors every day at WealthForge, we were a bit caught off-guard by this idea, but Commissioner Piwowar went on to explain his rationale. He argued that, because disclosure is mandated by the fraud rules, it doesn’t make sense to prohibit non-accredited investors from investing in securities which typically have a high return just because there is the possibility of higher risk.
Additionally, he pointed out that the idea behind limiting private placements to only accredited investors ignores the whole concept of a well-diversified portfolio. Portfolio theory explicitly accounts for risk in isolation, yet the SEC bars non-accredited investors from taking on that risk, no matter how sophisticated the investor is. Commissioner Piwowar was clear that this is a personal opinion and is not the opinion of the Commission. Nevertheless, it is clear that the Commission is going to make needed changes to the accredited investor definition.
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