On December 18, 2015, the staff (the “Staff”) of the U.S Securities and Exchange Commission (the “SEC”) released a report on their review of the definition of “accredited investor” under the Securities Act of 1933. This review was undertaken in accordance with Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which requires the SEC to review the accredited investor definition (as it relates to individuals) every four years to determine whether it should be revised. This is the first such review.
The Staff recommended that the SEC consider two broad categories of potential revisions to the accredited investor definition: (i) quantitative revisions, which would affect the dollar-based thresholds for determining accredited investors, and (ii) qualitative revisions, which would allow individuals with demonstrable investment knowledge/experience to qualify as an accredited investor without having to meet the income/net worth requirements. The potential revisions are set forth below.
Potential Quantitative Revisions
Although the Dodd-Frank Act only required that the accredited investor definition be reviewed as it relates to individual investors, the Staff also reviewed the definition as it relates to entities. The Staff recommended that the SEC consider the following quantitative revisions to the definition of accredited investor that would cover both individuals and entities:
- Leave the current income and net worth thresholds in place, subject to investment limitations.
- Create new, additional inflation-adjusted income and net worth thresholds that are not subject to investment limitations.
- Index all financial thresholds for inflation on a going-forward basis.
- Permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors.
- Revise the definition as it applies to entities by replacing the $5 million assets test with a $5 million investments test and including all entities rather than specifically enumerated types of entities.
- Grandfather issuers’ existing investors that are accredited investors under the current definition with respect to future offerings of their securities.
Potential Qualitative Revisions
The Staff proposed the following potential qualitative revisions to the definition of accredited investor that would be applicable only to individuals:
- Permit individuals with a minimum amount of investments to qualify as accredited investors.
- Permit individuals with certain professional credentials to qualify as accredited investors.
- Permit individuals with experience investing in exempt offerings to qualify as accredited investors.
- Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer’s funds.
- Permit individuals who pass an accredited investor examination to qualify as accredited investors.