On Thursday, October 9, the Investor Advisory Committee of the Securities and Exchange Commission will meet to discuss whether to recommend a change to the definition of “accredited investor.” This definition has historically played a central role in determining whether an offering of securities qualifies for the private offering exemption established by SEC regulation. Any potential changes to this definition could affect a company’s ability to raise capital in the private markets.
The Securities Act of 1933 provides an exemption from the registration and disclosure requirements for securities offerings not involving any public offering. SEC regulations over the last 50 years have clarified the means by which companies can offer securities without triggering these registration and disclosure requirements. The vast majority of private offerings today are conducted in reliance on Rule 506 of Regulation D, which allows for sales to an unlimited number of accredited investors without the need to register the offering. The rationale is that persons deemed to be accredited investors are sufficiently sophisticated to understand the risks inherent in any private offering, have the means to bear the economic risks associated with a purchase, and are able to negotiate with the issuer to obtain information about the issuer and the offering. For an individual to qualify as an accredited investor under the current definition, which was originally adopted in 1982, such person must have a net worth exceeding $1 million (excluding his primary residence) or individual income of at least $200,000 (or $300,000 with her spouse). Many investors and observers argue that these net worth and income thresholds are no longer relevant since they do not account for the last 30 years of inflation.
The Investor Advisory Committee previously discussed changes to this definition in July 2014, but could not agree on a recommendation. It remains to be seen whether the Committee will recommend modification of the net worth and income thresholds or more comprehensive changes – but it appears that recommended changes are in the works.