The Problems with Accredited Investor Restrictions

The COVID-19 pandemic has made it challenging for junior mining companies to raise the capital they need, and accredited investor restrictions are being highlighted as another barrier.

Private placements are the most common way for juniors to raise capital in the mining sector because they don’t require the money and time commitment of selling shares on the open market.

However, only accredited investors can participate in private placements — and some mining industry analysts think the high bar for achieving accredited investor status is ultimately further compounding the struggles facing junior mining companies trying to raise capital in uncertain times.

Speaking with BNN Bloomberg at the Prospectors & Developers Association of Canada Convention this year, John Kaiser of Kaiser Research said that to further open up this common pathway to funding, changes need to be made to the current requirements for attaining accredited investor status.

Kaiser pointed out that the Boomer generation has become wary of gambling on riskier investments such as junior mining stocks, while the younger generation of investors lacks the net worth and high level of income to qualify for private placement buy-ins.

“This system is being starved to death for capital,” he said.

Kaiser’s solution to the problem with accredited investor restrictions is to broaden the investor base through investor education and changes to the current regulations.

Kaiser has been calling for these changes for a number of years. Speaking about accredited investor restrictions at the Vancouver Resource Investment Conference in 2015, Kaiser said, “This system is destroying the financial services sector as a gateway of capital for the junior, which is why, again, you need to go directly to retail and enable them to give money directly.”

Part of the problem is that the accredited investor requirements assume that high net worth is directly correlated with an in-depth knowledge of private markets, or at least a higher level of financial sophistication than the general public.

During his 2015 talk, Kaiser said, “You have to be worth a million dollars, not including your residence, or have made a couple hundred grand for each of the past two years to be allowed to put money directly into the treasury … You can blow your brains out buying shares in the open market … but they have said you cannot do it if you’re not worth a lot.”

He also pointed out that the accredited investors club may have other unintended members, such as:

• people who have inherited wealth
• lottery winners
• children “who get employed by organizations by wealthy relatives in a nepotistic (way)”

Kaiser suggested back then that retail investors who’ve done their homework on a company, but who may not make the earnings cut, get left out in the cold by accredited investor restrictions. “This is a garbage distinction and it needs to be changed,” he said.

In his interview with BNN Bloomberg, Kaiser mentioned that Canada’s Existing Security Holder Prospectus Exemption, announced in 2014, was a step in the right direction, but not far enough. Under that exemption, as long as an investor is a shareholder in a company at least one day prior to the announcement of a private placement offering, that individual can participate in the fundraising with an investment of up to C$15,000.

In the US, the Securities and Exchange Commission is currently reviewing proposed changes to existing regulations that may result in a widening of the definition of an accredited investor by adding categories of eligibility based on professional knowledge, experience or certifications.

“The proposed changes signal the latest step in a general direction that the U.S. has been heading towards facilitating better access to capital for startups through the easing of restrictions on individual investors,” reported Forbes earlier this year.

We would love to hear your thoughts on the current and proposed changes to the accredited investor regulations. Is it time to relax accredited investor restrictions and allow more investors to participate in high-risk/high-reward investment opportunities? Let us know in the comments.

This is an updated version of an article first published by the Investing News Network in 2015.

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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.