Insights from the experts in investment fiduciary responsibility.

An Update to Reg D could be Opportunity for Advisors Willing to Take on Additional Due Diligence

Posted by Bennett Aikin on March 25, 2015

Permalink |     

Regulation D is an SEC rule designed to help small businesses raise capital by offering the sale of unregistered securities to investors deemed qualified to step into the private-placement market. Since the rule was created in 1982, the threshold for becoming an accredited investor had entirely to do with the size of the investor’s bank account, rather than any financial acumen.

The rule is due for a required review this year and it appears as if expanding the definition to include investors who meet a sophistication test is on the table. If that were to happen, it could be a major, new opportunity for advisors to get into that market. However, with that new opportunity comes increased responsibility to ensure client assets are protected and in investments that are suitable for the portfolio.


In his most recent Fiduciary Corner column for InvestmentNews, fi360 CEO Blaine Aikin looks at some of the options open to the SEC for determining who is qualified to get into this more sophisticated market. Among the possibilities raised by two of the SEC’s volunteer advisory panels are:

  • Credentials – earning a nationally recognized designation (think CFA) or passing a standard examination (Series 7) demonstrates the investor understands the risks involved
  • Financial Thresholds – minimum assets demonstrate that the investor can withstand a large loss. The thresholds have not been updated since 1982, however, and it might make sense to now raise that limit and to exclude valuable assets such as primary residence and retirement accounts so as to limit the possibility of financial catastrophe to the investor.  
  • Representation – investors who do not meet the standards for accreditation are eligible to invest in Regulation D offerings if represented by a professional purchaser (advisers, brokers, lawyers, etc.). We might also see this provision tightened up to forbid advisors with a personal stake in an offering from recommending a private placement and to require those who do to meet a fiduciary standard.


While the opening up of a restrictive market presents obvious opportunities for advisors to expand their offerings, Regulation D offerings present unique challenges when performing normal due diligence. These are typically early-stage companies that lack liquidity and third-party research. For an advisor to be able to demonstrate prudence in due diligence, it may require deep looks into a company’s financials and industry position, as well as interviews with management. As with any investment recommendation, the advisor must be able to articulate and demonstrate why that investment was superior to alternatives in the context of the overall portfolio and for achieving the client’s investment objectives.

* * * * *

Blaine’s column can be found at You can learn more about the prudent selection of investments and fiduciary due diligence requirements by attending fi360’s AIF Designation Training. 

AIF training options

Previous Post Next Post Return to Blog

Updated weekly

Have an idea for the Fi360 blog?
Send us your question or comment

Subscribe to the Fi360 Blog

Let’s get to work. Connect