Several weeks ago, the Advisory Committee on Small and Emerging Companies (the “Committee”) of the Securities and Exchange Commission (the “SEC”) set forth its rather limited recommendations regarding the definition of Accredited Investor (“AI”) as it applies to natural persons as found in Rule 501 under the Securities Act of 1933, as amended. In recommending that the existing income and net worth thresholds for AIs should remain unchanged, the Committee noted that smaller public companies and emerging companies play a significant role as drivers of U.S. economic activity, innovation and job creation, and that the ability of such companies to raise capital in the private markets is critical to the economic well-being of the United States.
The Committee made four recommendations to the SEC, as follows:
- As the SEC reviews the definition of AI, the primary goal should be to “do no harm” to the private offering ecosystem, and any modifications to the definition should have the effect of expanding, not contracting, the pool of AIs. For example, the Committee would recommend including within the definition of AIs those investors who meet a sophistication test, regardless of income or net worth.
- To take into account the effect of future inflation, going forward, the SEC should adjust the AI thresholds according to the consumer price index.
- Rather than attempting to protect investors by raising the AI thresholds or excluding certain assets classes from the calculation to determine AI status (which the Committee believes are measures of dubious utility), the SEC should focus on enhanced enforcement efforts and increased investor education.
- The SEC should continue to gather data on this subject for ongoing analysis.
For additional information, please see the Committee’s letter here.