Investor Protection | Regulatory Commentary
A proposed rule would strip away the last substantive review that non-traded REITs, non-traded BDCs, and similar illiquid products receive before they are sold to the public. Here is what the proposal does, why it matters to ordinary investors, and what I asked the Commission to do instead.
On July 27, 2026, I submitted a formal comment letter to the U.S. Securities and Exchange Commission on its proposed Registered Offering Reform amendments, File No. S7-2026-17. I filed the letter in my individual capacity, drawing on roughly a decade as Senior Enforcement Counsel in the SEC's Miami Regional Office and on my current practice representing investors in securities arbitration nationwide. You can read the full letter in the SEC's public comment file.
Most of the proposal is sensible modernization, and I said so. My letter focuses on one provision that is not. Buried in the rulemaking is a new definition of "qualified purchaser" that would eliminate state registration review for every registered offering in the country, including offerings of securities that never trade on any exchange. If you have never heard of state merit review, that is understandable. It works quietly, before products reach your account. This article explains what would be lost.
Federal law lets the SEC define a category of "qualified purchasers" whose transactions are exempt from state registration requirements. Congress created that authority in 1996 on the premise that some investors are sophisticated enough to protect themselves. The current proposal would define the term to include every purchaser in every SEC-registered offering, from institutional money managers down to a retiree buying an illiquid product in an IRA.
For securities listed on the New York Stock Exchange or Nasdaq, state registration was preempted long ago, and exchange listing standards do real protective work in its place. The offerings that would newly lose state review are different. They are overwhelmingly non-traded real estate investment trusts, non-traded business development companies, and similar direct participation programs. These products do not list on an exchange, do not face listing standards, and are sold almost entirely to retail investors.
The SEC reviews registered offerings for disclosure. Its own Division of Corporation Finance states plainly that the staff does not evaluate the merits of any transaction or determine whether an investment is appropriate for any investor. State securities examiners, applying uniform national standards developed through NASAA, do something federal review does not. They require the offering itself to be structured fairly before it can be sold. Among other things, current standards require
One protection deserves special attention. Effective January 1, 2026, a uniform national standard caps a non-accredited investor's total holdings in non-traded REITs, BDCs, and similar programs at 10 percent of the investor's liquid net worth. That limit exists because these products cannot be sold when things go wrong, and overconcentration turns an unsuitable investment into a ruinous one. The limit has legal force only through state registration. There is no federal equivalent. If preemption is adopted as proposed, the only bright-line concentration protection in the system disappears, mere months after it finally took effect nationwide.
Disclosure of an unfair structure does not make the structure fair. State review is the only point in the process where anyone with authority asks whether the deal itself treats investors fairly before the money changes hands.
The SEC's own comment file already contains proof of what state review catches. Washington State's securities examiners refused to register demand notes offered by an affiliate of iCap Enterprises in 2020 because the issuer could not satisfy basic debt offering standards. The SEC had declared the very same offering effective. iCap was later revealed to be a $250 million Ponzi scheme. Washington's regulators report that applications for these products rarely satisfy substantive requirements when first filed, even after the SEC has signed off. Oklahoma's securities administrator reported a similar case from her own files, an issuer that walked away from state registration after examiners flagged undisclosed insolvency indicators, completed its federal registration anyway, and went bankrupt.
This proposal arrives while non-traded REITs and BDCs are under visible stress. Funds have suspended their share repurchase programs, leaving investors unable to exit positions burdened by high affiliate compensation and disappointing returns. In my arbitration practice, the investors holding these products are disproportionately retirees and near-retirees, and the products are increasingly marketed for retirement accounts. Removing structural protections at the very moment investors are trapped in illiquid vehicles is the wrong direction at the worst time.
The preemption would also automatically reach markets the proposal never analyzes, including registered tokenized offerings that trade on crypto asset venues rather than exchanges. In that market, review before the sale is often the only protection that operates before the money is gone, because crypto fraud proceeds dissipate quickly and the wrongdoers are frequently offshore or judgment proof.
My letter urges the Commission to withdraw the proposed definition and answers the Release's own request, in Question 111, for narrower alternatives. The legitimate complaint behind the proposal is the cost and friction of clearing more than fifty separate state filing regimes, and that problem can be solved without eliminating anyone's protections. I recommended three measures.
These steps give issuers a faster, cheaper, more uniform path to market. They simply decline to purchase that efficiency with the structural protections of retail investors.
For attorneys following the rulemaking, the letter's core legal argument is statutory. A definition of "qualified purchaser" that includes every purchaser reads the word "qualified" out of Section 18(b)(3), renders the exchange-listing line of Section 18(b)(1) surplusage for registered offerings, and abandons the sophistication premise both committee reports attach to the term. The letter also addresses why Lindeen v. SEC cannot carry the weight the Release places on it. Lindeen upheld a definition bounded by Regulation A Tier 2's offering caps, investment limits, and reporting conditions, and it rested on Chevron deference, which Loper Bright has since overruled. Under statutory stare decisis, Lindeen's specific holding survives, but extending it to an unconditioned definition covering every registered offering is a new interpretive question that a reviewing court now answers for itself.
The proposal is forward-looking, so it would not change the terms of a product you already own. It matters to you in two ways. It signals how much regulatory protection future offerings of these products would carry, and the state-level suitability and concentration standards it would eliminate currently serve as objective benchmarks when overconcentrated investors pursue recovery of their losses in arbitration.
Potentially, depending on the facts. If a financial advisor recommended an illiquid product that was unsuitable for your circumstances, concentrated too much of your portfolio in these products, or misrepresented liquidity or risk at the point of sale, you may have a claim in FINRA arbitration against the recommending firm. Each case turns on its own facts, and time limits apply.
The comment period generates a public record the Commission must consider before adopting any final rule. The Commission can adopt the proposal, modify it, or withdraw parts of it. If the blanket preemption is adopted as proposed, my letter explains why it would face serious litigation risk under current administrative law.
No. I filed the comment in my individual capacity as a former SEC Senior Enforcement Counsel and a practicing securities arbitration attorney and CPA. The views in the letter and in this article are my own.
Riera Law Firm represents investors nationwide in FINRA, AAA, and JAMS arbitration on a contingency fee basis. If you were sold an illiquid alternative product that you cannot exit, a free and confidential case evaluation can tell you where you stand.
Request a Free ConsultationAttorney Advertising. Jorge L. Riera, P.A., d/b/a Riera Law Firm, 340 Sevilla Avenue, Coral Gables, FL 33134. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. This article is for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Past results do not guarantee a similar outcome. The comment letter discussed in this article was submitted by Jorge L. Riera in his individual capacity, and the views expressed are his own.