(Dow Jones) Concerns about the sale of private placements to less-than-sophisticated investors could get aired in Congress yet again as lawmakers try to reconcile two versions of the financial reform bill.
A joint Senate and House of Representatives conference committee has started its work, and those efforts could include discussion of standards for accredited investors. Those standards, set almost 20 years ago, are supposed to help ensure that private placements are marketed only to institutions and other well-to-do sophisticated investors.
Senate's financial reform bill, passed in May, would extend for at least four more years the $1 million minimum in net worth required to be eligible to purchase the securities. The provision would exclude, however, the value of an investor's primary home, which now counts toward reaching that threshold.
"It's progress. It means you don't automatically become an accredited investor because you own a house in New York or San Francisco," says Barbara Roper, director of investor protection for the Consumer Federation of America, an advocacy group.
The premise behind maintaining the $1 million threshold and other accredited investor standards, however, is wrong, she says. "We make assumptions-of sophisticated investors not needing protections of securities laws-that are clearly false," she says.
The bill that passed the House doesn't address private placements.
The Senate stance was a compromise, say lawyers and other start-up company advocates who have followed the legislative process. Trade groups, such as the Angel Capital Association in Overland Park, Kan., sought to maintain the current accredited investor standards which, they argued, made private placements available to a wider audience of potential investors.
Many start-up companies are relying on private placements as their primary source of financing, particularly as conventional lenders have tightened their credit standards during the turbulent economy.
The same groups, however, also sought to eliminate a provision in an earlier version of the legislation that would have required issuers to file their offerings with the Securities and Exchange Commission, which then would have 120 days to review filings. Businesses that needed cash would not be able to wait out the four months, they argued. That view prevailed, and the waiting period was eventually stricken from the Senate bill.
Meanwhile, investor advocates sought to increase accredited investor standards, amid a spate of allegedly fraudulent offerings of private placements through brokerages. Many Reg-D securities, as private placements are also called, aren't sold through brokerages but directly by companies to accredited investors.