The Dodd-Frank Act requires the SEC to reexamine the definition of “accredited investor” under the Securities Act of 1933 every four years to determine if it should be modified. Under the current test, adopted in 2010 when the Dodd-Frank Act was enacted, an individual is considered an “accredited investor” if he or she has at least $200,000 in annual income in each of the two most recent years ($300,000 for married couples) or $1 million in net worth, excluding the investor’s primary residence.
A week-and-a-half ago the SEC’s Investor Advisory Committee met to, among other things, consider revisions to the accredited investor definition. Think Advisor summarized some of the comments made at the meeting. It noted that Barbara Roper, who chairs the Investor as Purchaser Subcommittee, said she is focused on a definition that is limited to natural persons. Roper also suggested the addition of a sophistication standard while University of Denver Law Professor J. Robert Brown stated that a net worth standard should exclude retirement assets.
Financial Advisor related the comments of Ann Yeager, Director of the Council of Institutional Investors, who cautioned the Committee that it must not, in the name of investor protection, remove an investor’s right to invest.
Entrepreneur similarly raised the concerns of angel investor groups, who fear that a simple numerical increase in income and net worth thresholds would significantly reduce the number of individuals available to provide start-up financing.
Writing for Small Business Trends, Case Western Reserve University Professor Scott Shane suggested an alternative standard for determining who is an accredited investor. Shane propounds a fixed investment approach which would limit “the amount a person can invest in a single, nonpublic securities offering to a set fraction of his or her net worth.”
Crowdfund Insider summarized the comments submitted by SeedInvest to the SEC. SeedInvest also suggested alternative methods for determining an investor’s sophistication, including the use of an “accredited investor test,” the consideration of an investor’s advanced degrees, and the use of third-party intermediaries.
After meeting with other SEC offices and divisions, the Committee is expected to make its recommendations in October.