SEC Advisory Committee Makes Accredited Investor Recommendations

SEC Advisory CommitteeSummary

SEC Investor Advisory Committee makes recommendations to the SEC regarding “accredited investor” definition and related considerations

  • No specific changes to financial thresholds recommended
  • New “financial sophistication” basis for accreditation proposed
  • Investment amount limitations suggested
  • Alternative means of verifying accreditation encouraged
  • Additional standards for purchaser representatives and protections to non-accredited investors urged

Accredited Investor Recommendations

Last week the SEC Investor Advisory Committee met to discuss and consider whether the SEC should revise the definition of “accredited investor” and related matters. There has been much concern raised as to whether a revised definition could narrow the pool of accredited investors, and thereby have a chilling effect on investment in early stage companies and, as a result, on innovation and economic growth. The IAC’s recommendations do not include doing this; they do, however, propose analysis of whether the definition should be revised, so the issue is not yet dead.

The Committee’s five recommendations to the SEC were:

Recommendation 1:

The Commission should carefully evaluate whether the accredited investor definition, as it pertains to natural persons, is effective in identifying a class of individuals who do not need the protections afforded by the ’33 Act. If, as the Committee expects, a closer analysis reveals that a significant percentage of individuals who currently qualify as accredited investors are not in fact capable of protecting their own interests, the Commission should promptly initiate rule-making to revise the definition to better achieve its intended goal.

Recommendation 2:

The Commission should revise the definition to enable individuals to qualify as accredited investors based on their financial sophistication.

Recommendation 3:

If the Commission chooses to continue with an approach that relies exclusively or mainly on financial thresholds, the Commission should consider alternative approaches to setting such thresholds – in particular limiting investments in private offerings to a percentage of assets or income – which could better protect investors without unnecessarily shrinking the pool of accredited investors.

Recommendation 4:

The Commission should take concrete steps [to] encourage development of an alternative means of verifying accredited investor status that shifts the burden away from issuers who may, in some cases, be poorly equipped to conduct that verification, particularly if the accredited investor definition is made more complex.

Recommendation 5:

In addition to any changes to the accredited investor standard, the Commission should strengthen the protections that apply when non-accredited individuals, who do not otherwise meet the sophistication test for such investors, qualify to invest solely by virtue of relying on advice from a purchaser representative. Specifically, the Committee recommends that in such circumstances the Commission prohibit individuals who are acting as purchaser representatives in a professional capacity from having any personal financial stake in the investment being recommended, prohibit such purchaser representatives from accepting direct or indirect compensation or payment from the issuer, and require purchaser representatives who are compensated by the purchaser to accept a fiduciary duty to act in the best interests of the purchaser.

These recommendations punt the underlying concern of whether the definition of “accredited investor” would be revised to increase the financial thresholds in the definition, including, as has been suggested, an adjustment for inflation, even though the financial thresholds have not been revised since the “accredited investor” definition was first adopted in 1982. The Committee acknowledged the need to balance protecting the investing public with the need to not overly curtail investment, with several specific references to angel investing, but it remains to be seen what changes, if any, are ultimately made, and whether those changes would, in fact, restrict the availability of money to companies.

The recommendations, along with the rationale behind the recommendations, can be found at the following link:

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Crowdfunding! @ Seattle Startup Week

Crowdfunding!My team at Davis Wright Tremaine and I are excited and honored to be able to help kick off the first day of Seattle Startup Week 2014 with an intensive meetup about the legal ins-and-outs surrounding Washington State Equity Crowdfunding.

As one of the ideators of the Washington State crowdfunding legislation, I will be passing along my knowledge of the rules. We will also cover the JOBS Act, 506(b) vs. 506(c), general solicitation of fundraising rounds, and other fundraising alternatives.

Seattle Startup Week

This is your chance to support the community and mingle with hundreds of Seattle’s startup founders and investors.

Seattle Startup Week is five days of:

  • Intense learning
  • Fun workshops
  • Informative panels
  • Tours and activities
  • Networking


When: Monday, October 20, 2014

12:00 PM to 1:00 PM

Where: Davis Wright Tremaine LLP

1201 Third Ave #2200

Seattle, WA 98101



October 20th – 24th all over the city.

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FAA Grants Limited Exemptions Allowing Hollywood to Film With Drones

Legal Drones2By Diana Marina Cooper

In a surprising move last week, the Federal Aviation Administration (FAA) granted permission to six Hollywood companies to film using unmanned aerial vehicles (UAVs).

The FAA is currently developing rules to integrate UAVs into the domestic airspace, and to date the agency has blocked virtually all commercial operations from taking place.

Under the current system, those looking to operate UAVs for commercial purposes can only proceed if they receive an exemption from the FAA. Although numerous companies have attempted to obtain exemptions, the FAA has been reluctant to approve such applications. In fact, prior to the Hollywood exemptions, the agency has only approved a limited number of commercial flights for oil companies operating in remote areas of Alaska. The FAA defends its cautionary approach to regulation of UAVs by pointing to a need to develop a comprehensive framework to protect the safety of people and property on the ground.

Although the Hollywood exemptions represent a move in a positive direction, the restrictions placed on the companies are quite onerous, for instance the operations must take place in a controlled closed-set environment and may only be completed below 400 feet and within the visual line of sight.

The FAA has been working to develop UAV regulations since the enactment of the FAA Modernization Act of 2012. Although the notice of proposed rules is set to be released sometime this fall, companies still face a long wait until commercial operations become mainstream. The release of the draft rules will be followed by a public notice and comment period, and subsequently the agency will have to craft the final rules.

While the US determines how best to regulate UAVs, it is quickly falling behind other countries that already have frameworks in place to support commercial operations. For instance, Canada has adopted a system that allows companies to apply for Special Flight Operations Certificates (SFOCs) in order to complete commercial flights. The Canadian regulations generally do not establish bright line rules – for instance they do not specify whether you need a pilot’s license to operate a UAV or whether it is permitted to fly beyond the line of sight. Rather, Transport Canada (the regulatory agency that issues SFOCs) assesses applications using a case-by-case approach. Although the Canadian system is somewhat inefficient because of the lack of specificity, over the last few years an increasing number of SFOCs have been issued to companies representing a variety of industries including the film industry, agriculture and oil and gas.

Diana Marina Cooper is the Head of the Unmanned Aerial Systems and Robotics Practice Group at LaBarge Weinstein LLP, and is also an Associate in the firm’s Intellectual Property and Licensing Group.  She advises drone companies on airspace regulations, intellectual property, privacy and commercial contracts.  Diana also provides intellectual property, privacy by design and technology transaction services to emerging technology companies.  She has authored a number of publications and has given talks on intellectual property and privacy issues raised by drones and robotics.

Posted in Business/Corporate Law | Tagged , , , | 5 Comments