The U.S. Securities and Exchange Commission’s Investor Advisory Committee has called on the agency to update its age-old definition of “accredited investors,” a move that some investors fear could reduce the number of people eligible to invest in private stock offerings.
Under a standard written in 1982, an accredited investor is defined as a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years, or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value of the primary residence. About 8.5 million investors currently qualify as accredited.
But earlier this month, the Investor Advisory Committee, a creation of the Dodd-Frank Act, recommended that the SEC “seek to determine whether the current definition achieves the goal of identifying a class of individuals who do not need the [disclosure protections of the Securities Act of 1933] in order to be able to make an informed investment decision and protect their own interests.”
The definition of accredited investor has also taken on heightened importance due to the Jumpstart Our Business Startups (JOBS) Act, through which the Securities and Exchange Commission lifted the ban on general solicitation, which allows companies to market private placements broadly.
The JOBS Act allows companies to market private placements anywhere, including on social media. But they can only sell to accredited investors, and issuers are responsible for verifying that their investors are accredited.
The current definition of accredited investor “is, at best, a highly imperfect proxy for financial sophistication and access to information,” the SEC’s committee said, encouraging the Commission to “consider alternative approaches that would better protect vulnerable investors without unnecessarily constraining the supply of capital in the private offering market.”
Those alternatives do not include raising the income and net worth thresholds, the IAC said, since relying on income and net worth “oversimplifies the factors that determine whether an individual truly has the wealth and liquidity to shoulder the potential risks of private offerings.”
The committee wants the SEC to consider a definition of sophisticated investor that takes into account an individual’s education; professional credentials, such as chartered financial analyst designation or Series 7 license; and investment experience.
IAC member Barbara Roper told Investment News that the committee was seeking to “at least maintain and possibly expand the pool of available investors.” But David J. Paul, chief strategy officer at Propellr, an online platform for real estate investing, said the panel’s recommendations were aimed ultimately at restricting the pool of accredited investors.
“We believe that the current standard is not so much inadequate as incomplete,” he told Investment News. “It should be broadened to include not just rich people but smart people, not that those two categories are mutually exclusive.”
Source: Investment News Accredited-investor definition revamp backed by SEC panel