In the past two years, about 100,000 accredited investors (AIs) have participated in Regulation D offerings of private securities for the first time. That is roughly a 50 percent increase in yearly AI participation in Reg D offerings, according to data compiled by Offerboard.
This surge of investor interest in alternative assets is attributed largely to Title II of the Jumpstart Our Business Startups Act of 2012, which lifted the ban on general solicitation for Rule 506(c) offerings. Title II went into effect in September 2013, and since then approximately 9 percent of Reg D offerings have used the Rule 506(c) exemption.
General solicitation will continue to pull in tens of thousands more AIs each year, out of the several million who have heretofore been sitting on the sidelines. Here is why you can expect the surge to continue rather than plateau:
First, general solicitation is a “game changer,” as the resulting flow of mass advertising will expose millions of previously unaware investors to alternative investment opportunities, says Jonathan Friedland, author of The Investor’s Guide to Alternative Investments. Even if the rate of adoption is slow at first among some groups of investors, new investors in Reg D offerings will become “like a snowball rolling downhill” in the years ahead, says Friedland, publisher of Accredited Investor Markets and partner in the Chicago law firm Levenfeld Pearlstein.
Second, accredited investors depend on advice from their registered investment advisers, who have been cautious about investing in 506(c) offerings, especially on crowdfunding platforms. “The vast majority [of RIAs] are still getting up to speed on…crowdfunding,” says Friedland.
RIAs will become more comfortable in this space, however, particularly as they see that since general solicitation has been permitted, “the results are overwhelmingly positive in terms of the number of completed financings, investor participation, and [lack of] regulatory problems from investor complaints,” says Douglas S. Ellenoff, a New York City securities lawyer who has worked with Congress and the SEC on JOBS Act regulations.
Third, investors will show more interest in private securities in the next few years as the public securities market slows down, and as they realize how angel investing should fit into their portfolios, predicts Christopher Cahill, the host of Accredited Investor Markets Radio and a lawyer with the Chicago firm Lowis & Gellen. As baby boomers approach or enter retirement, and they see that interest rates are low while equity valuations are high (and government efforts to stimulate growth are exhausted), they will become more aware of the need to diversify into alternatives, Cahill points out.
The launch of Title III equity crowdfunding, maybe in early 2016—where unlimited numbers of non-accredited investors can participate in private securities offerings—will further fuel the awareness of this need to diversify into alternatives.
David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…
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