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SEC Publishes Accredited Investor Definition Review
Accredited Investors | Dec 19, 2023
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The Securities and Exchange Commission (SEC) has just published a comprehensive report reviewing the definition of an 'Accredited Investor'
This development is of great interest to the financial community, including Canadian investors and market participants.
Current Definition
- An Accredited Investor is currently defined as an individual with an annual income over $200,000, or a net worth exceeding $1 million, excluding their primary residence.
- For married couples, the threshold is $300,000. These investors play a crucial role in private securities markets, particularly in Reg D offerings, which represent a significant portion of the financial market.
- The SEC made minor expansions to the definition, including the inclusion of certain professional certifications, like the Series 7. However, the definition remains largely restrictive, limiting the majority of the U.S. population from participating in these investment opportunities.
Potential Changes on the Horizon
- The SEC's report does not conclude with definitive changes but signals an ongoing review for potential updates.
- A notable consideration is the removal of retirement accounts from the net worth calculation for Accredited Investor status. This change could reduce the number of households qualifying as Accredited from 16.44 million to 11.6 million, underlining concerns about investor sophistication in Reg D offerings.
- The report also touches on the sophistication qualification, a topic of debate among investors and legislators. However, the SEC's stance appears dismissive of this route, despite its potential to democratize investment opportunities.
See: House Passes Bills to Broaden ‘Accredited Investor’ Definition
- A significant section of the document is dedicated to the idea of adjusting income and wealth thresholds for inflation, contemplating whether this should be applied retroactively from the time the definition was initially set or implemented from the current period onwards.
- State regulators have expressed concerns that the current definition is too inclusive, failing to account for inflation and including assets that may not reflect an investor's ability to bear investment risks. The North American Securities Administrators Association (NASAA) has recommended excluding assets in defined contribution plans from the net worth calculation and adjusting the thresholds for inflation.
- Marcia Dawood, Chair of The Angel Capital Association (ACA) raised concerns that the proposed indexing would exclude about 50% of angels from participating in the US. Additionally, the ACA noted that, based on their experience, instances of fraud in this sector are minimal to nonexistent.
The SEC's Approach and Public Sentiment
Although the SEC is calling for public feedback, there is skepticism about the influence of public opinion on the final decision. For example, entities like the SEC Small Business Capital Formation Advisory Committee (SBCFAC) have repeatedly urged the Commission to broaden the definition, yet their recommendations have often been disregarded.
See: AOIP Advocates for Enhanced Capital Formation and Investment Opportunities for SMEs
The current SEC leadership appears to favor a more regulated approach, potentially increasing the barriers to participating in private offerings. This stance contrasts with the public's desire for more inclusive investment opportunities.
Outlook
This review, amidst debates over investor sophistication and market inclusivity, reflects a cautious regulatory approach that may heighten barriers to private market participation. Key considerations include the possible exclusion of retirement accounts in net worth assessments and adjustments of income and wealth thresholds for inflation. The outcome of this review will be crucial for investors and market participants, balancing the need for protection with the desire for broader investment opportunities.
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