At the Practising Law Institute’s SEC Speaks program held on February 19-20, SEC staff members and representatives of the Division of Corporation Finance addressed the Report on the Review of the Definition of “Accredited Investor”, published in December 2015. The study, mandated by Dodd-Frank, addressed the current definition of an “accredited investor”, which has not been updated since 1982 and provided staff recommendations regarding further action.
The Securities Act and the rules and regulations adopted thereunder, categorize accredited investors for exemptions from registration requirements under Section 4(a)(5) and Regulation D Rules 504-506. Under the current definition, natural persons are accredited investors if they meet a $200k annual income or $1m net worth threshold.
The report cites several criticisms of the current definition; notably that the definition is over-inclusive because the financial thresholds have not been adjusted for inflation and the net worth calculation includes certain assets, such as retirement accounts, that some believe should be omitted. Additionally, some commenters critique that the definition is over-inclusive, because sophisticated investors who do not meet earnings requirements may not qualify.
In the report, the staff recommends that the Commission consider the following methods of revising the accredited investor definition:
- Establish a new income threshold of $500k, a joint income threshold of $750k, and a net worth threshold of $2.5m.
- Permit individuals with a minimum amount of investments to qualify as accredited investors.
- Consider professional credentials, such as Series 7 or 82 accreditations, in determining whether an investor meets sophistication standards.
- Permit individuals with particular experience investing in exempt or related offerings to qualify.
- Develop an investor examination for individuals to qualify as accredited investors, which would enable financially sophisticated investors to be included regardless of wealth.
If the staff’s recommendations were immediately implemented, the staff indicated that the approximate pool of the population that would be eligible under the revised definition of an “accredited investor” would increase from 10.1% to 11.5%