An Open Letter To The SEC From The Hedge Fund Association

Oct 7 2014 | 6:36am ET

By Ron Geffner
Partner, Sadis & Goldberg LLP
Vice President, The Hedge Fund Association

On behalf of hedge funds, private equity funds, venture capital funds, real estate funds and other growing operating businesses seeking capital in the U.S. from private investors rather than banks, both I and the Hedge Fund Association (HFA) are concerned with the U.S. Securities and Exchange Commission’s (SEC) discussion to change the definition of an “accredited investor.” 

For the following reasons, we strongly and respectfully urge the SEC to reject an increase in the current requirements to account for inflation: (i) the definition was significantly narrowed when the value of an investor’s primary residence was excluded under The Dodd–Frank Wall Street Reform and Consumer Protection Act; (ii) such a change would fundamentally undermine the private placement market which infused nearly $50 billion into the United States’ economy in 2013 and will materially and negatively impact small business growth by reducing the number of accredited investors in the United States by more than half, according to a survey by equity crowdfunding site SeedInvest; (iii) small and emerging private fund managers rely heavily upon investments made by high net worth individuals rather than institutional investors - an increase in the financial requirements under the accredited investor standard will have a devastating and deep lasting impact on emerging and small managers of private funds; and (iv) any restriction on the definition of "accredit investor" that is arbitrarily based on a net worth criteria would undermine the intent and objective of The Jumpstart Our Business Startups Act (JOBs Act) which was passed with the intent of making capital raising easier on growing business and private investment funds.

Other collateral damage likely occur if the economic requirements of “accredited investor” are  increased: (i) loss of Americans jobs – expect fewer people to be employed at or by private funds and growing operating businesses such as analysts, traders, back office support personnel, marketing staff, accountants, attorneys and compliance personnel; and (ii) fewer investment options for the remaining accredited investors – there will be fewer private funds and fewer operating businesses who historically have received financing from private funds will exist as a result.

Further, using net worth or income as a litmus test for investor sophistication is outdated. Under the current standard, wealthy individuals, regardless of education or financial sophistication, are afforded the “opportunity” to invest in certain transactions, while well informed, highly sophisticated and less wealthy investors are prevented from investing in the same opportunity due to an arbitrary economic cut off that presumes education or sophistication. The goal of protecting investors can be better achieved through alternative means, such as: (i) a knowledge or education-based standard, or (ii) a requirement that a non-sophisticated investor engage an independent registered investment professional to review and approve the investment.

Any revisions to the definition of "accredited investor" should achieve the objectives that both the regulators and the industry desire. We are in the process of a slow economic recovery from a global recession, and the SEC and Congress must be careful not to implement any rule that will stifle job growth and in fact lead to job losses in these precarious times.

Ron Geffner is a member of Sadis & Goldberg LLP and oversees the Financial Services Group. He regularly structures, organizes and counsels private investment vehicles, investment advisory organizations, broker-dealers, commodity pool operators and other investment fiduciaries.

Mr. Geffner also serves a Vice President of the Hedge Fund Association, an international not for profit industry trade and nonpartisan lobbying organization devoted to advancing transparency, development and trust in alternative investments.

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