Amending Regulation D's Accredited-Investor Definition to Allow Natural Persons to Opt Out of Unwanted Regulatory Protections
Fordham Journal of Corporate & Financial Law
Volume 30
Issue 1
Article 2
2025
Amending Regulation D's Accredited-Investor Definition to Allow
Natural Persons to Opt Out of Unwanted Regulatory Protections
John L. Orcutt
University of New Hampshire School of Law
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Recommended Citation
30 Fordham J. Corp & Fin. L. 47 (2025).
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AMENDING REGULATION D’S
ACCREDITED-INVESTOR DEFINITION TO
ALLOW NATURAL PERSONS TO OPT OUT OF
UNWANTED REGULATORY PROTECTIONS
John L. Orcutt *
INTRODUCTION........................................................................................ 48
I. REGULATING THE REGISTERED SECURITIES MARKET ........................... 55
II. RULE 506 AND THE ACCREDITED-INVESTOR DEFINITION .................... 64
A. The Rule 506(b) and Rule 506(c) Exemptions ........................ 65
B. Who Qualifies as an Accredited Investor?............................... 67
III. PRIVATE SOLUTIONS TO MARKET PROBLEMS .................................... 69
IV. CONCERNS ABOUT THE CURRENT ACCREDITED-INVESTOR
DEFINITION FOR NATURAL PERSONS ............................................... 75
A. The Definition May be Over-Inclusive .................................... 75
1. Inflation ................................................................................ 75
2. Retirement Assets ................................................................ 80
B. The Definition May be Under-Inclusive .................................. 83
1. Rule 506 Market’s Growth .................................................. 83
2. Clumsy Proxies for Financial Sophistication ....................... 87
3. Geographic Bias ................................................................... 89
4. Racial and Ethnic Bias ......................................................... 91
V. OPTING OUT OF BEING TREATED AS NONACCREDITED INVESTORS ..... 92
A. Different Ways to Protect Investors ......................................... 92
B. Mechanics of the Opt-Out Proposal ......................................... 96
C. Phase in the Opt-Out Proposal ................................................. 98
1. Stage 1—Start with Rule 506(b) .......................................... 99
2. Stage 2—Include Rule 506(c) ............................................ 101
D. Securities Act Section 2(a)(15) .............................................. 101
Professor of Law at the University of New Hampshire School of Law. Prior to joining
UNH Law, Orcutt worked for Robertson Stephens (the former investment bank
subsidiary of the FleetBoston Financial Group and of Bank of America) in various
roles, including serving as head of the firm’s West Coast Telecom Services Investment
Banking Practice and Chief Administrative Officer of the firm’s Mergers &
Acquisitions Group. Robertson Stephens was a leading investment bank for startups
and Rule 506 unregistered offerings.
*
47
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FORDHAM JOURNAL
OF CORPORATE & FINANCIAL LAW
[Vol. XXX
E. Will the Rule 506 Market Welcome the Opt-Out
Accredited Investors? Will Private Solutions Develop to
Help Them? ............................................................................ 102
CONCLUSION ......................................................................................... 106
INTRODUCTION
Should the Securities and Exchange Commission (SEC) expand the
population of natural persons who qualify as accredited investors?
Accredited investors can freely participate in unregistered securities
offerings under Rule 506 1 of Regulation D, 2 while nonaccredited
investors cannot. For companies seeking to raise capital, Rule 506
provides a lightly regulated alternative to initial public offerings
(“IPOs”) and other registered offerings, but most Americans are
excluded from investing in Rule 506 offerings. Should the SEC soften
that exclusion and allow more individuals to participate in what has
become the country’s largest capital-raising market? 3
Securities investing is an inherently risky endeavor that requires
high-quality information for investors to make thoughtful decisions. 4
Because issuers are better informed about their risks and rewards than
investors, federal securities law protects investors by imposing
substantial disclosure requirements on issuers that sell their securities in
public offerings. 5 Such issuers must register their transactions with the
SEC, 6 which includes publicly filing a detailed disclosure document,7
1.
2.
3.
17 C.F.R. § 230.506 (2024).
17 C.F.R. §§ 230.500-.508 (2024).
See U.S. SECURITIES & EXCHANGE COMMISSION (SEC) OFF. OF ADVOC. FOR
SMALL BUS. CAP. FORMATION, ANNUAL REPORT: FISCAL YEAR 2024 14-15 (2024)
[hereinafter 2024 SMALL BUSINESS CAPITAL FORMATION REPORT], https://www.sec.
gov/files/2024-oasb-annual-report-print.pdf; SEC OFF. OF ADVOC. FOR SMALL BUS.
CAP. FORMATION, ANNUAL REPORT: FISCAL YEAR 2023 14 (2023) [hereinafter 2023
SMALL BUSINESS CAPITAL FORMATION REPORT], https://www.sec.gov/files/2023-oasbannual-report-print.pdf.
4. See discussion infra Part I.
5. See Concept Release on Harmonization of Securities Offering Exemptions,
Securities Act Release No. 33-10649, 84 Fed. Reg. 30460, 30460 (June 18, 2019) (“The
purpose of registration is to provide investors with full and fair disclosure of material
information so that they are able to make their own informed investment and voting
decisions.”).
6. Securities Act of 1933 (“Securities Act”) § 5, 15 U.S.C. § 77e.
2025]
AMENDING REGULATION D'S
ACCREDITED-INVESTOR DEFINITION
49
called a registration statement, and committing to produce periodic
public disclosures thereafter 8 (the “Registered Path”). The Registered
Path is long, expensive, and heavily regulated, but an issuer’s payoff is
substantial as it can sell its securities to anyone, including the most
vulnerable investors. 9
For many issuers, however, the Registered Path’s payoff does not
justify its burden, so they choose to raise capital through unregistered
offerings. When Congress passed the Securities Act of 1933 10 (the
“Securities Act”) and created the federal registration process, it also
exempted certain securities and transactions from registration “where
there is no practical need for [registration] or where the public benefits
are too remote.” 11 Rule 506, which is the most important of the capitalraising exemptions, offers issuers a lightly regulated path for selling
their securities that is (...truncated)
