Originally uploaded at SSRN.


I devote most of this essay to exploring how, exactly, the Securities and Exchange Commission (“SEC”) should go about providing guidelines to implement the statutory requirement that issuers have a reasonable belief that a purchaser is accredited. The SEC has proposed rules, but these rules merely restate what Congress has already required, thus sidestepping Congress’s direction that the agency itself articulate some verification methods. Taking the SEC’s decidedly amorphous proposal to task, I recommend that the SEC offer two nonexclusive safe harbors for issuers to guide them in determining whether a natural person is an accredited investor. The paragraphs below will discuss the whys and wherefores of these safe harbors.

I focus on the natural persons category because my hunch is that it is the most politically salient and controversial. Here is why: even if the SEC heeds my suggestion and identifies safe harbors, it will ignore the elephant in the room. The problem is that the JOBS Act gave companies a newfound ability to trumpet their investments to the world but simultaneously limited actual purchases to accredited investors. Hopeful investors like our hypothetical Jim will now hear about tantalizing investments they cannot make. As I have argued elsewhere, this difficulty may be grave enough to trigger a rethinking of the public/private distinction that currently underpins our securities laws.