Under the Dodd-Frank Act, Congress requires the Securities and Exchange Commission (the “SEC”) to re-visit the “accredited investor” definition every 4 years to determine whether any modification to the definition is warranted. Generally, sales of securities to “accredited investors” are exempted from expensive, onerous registration and disclosure requirements under federal securities laws. Thus, the definition of “accredited investor” is critically important for businesses seeking capital investment.
With respect to natural persons, the current “accredited investor” definition includes individuals with (i) an annual income of at least $200,000 per year ($300,000 with their spouse) and the reasonable expectation of that income in subsequent years; or (ii) a net worth of at least $1 million (excluding the individual’s primary residence). At its core, the “accredited investor” definition attempts to identify those individuals who are likely best able to understand the financial risks of the investments they make, and would be able to withstand the total loss of a given investment.
As part of the SEC’s requirement to re-address the definition of “accredited investor” every 4 years, the SEC issued a staff report on December 18, 2015. The report considers the history of the accredited investor, other ways of defining “accredited investor,” and “provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors.”
Specifically in the report, the SEC staff recommends that the SEC take one or more of the following actions:
· Revising the financial threshold requirements for natural persons to qualify as accredited investors (e.g. (1) leaving current income and net worth thresholds in place, but subjecting investors to investment limitations; (2) including inflation-adjusted income and net worth metrics; or (3) allowing spousal equivalents to pool resources); and/or
· Revising the accredited investor definition to allow individuals to qualify as accredited investors based on other measures of sophistication (e.g. permitting individuals (i) with certain professional credentials to invest; (ii) with the requisite experience in investing in exempt offerings; or (iii) who pass an “accredited investor” examination, all regardless of financial metrics).
The SEC (and Wormser Legal) is inviting public commentary on the “accredited investor” definition. What do you think? Do you think that the current definition of “accredited investor” sufficiently identifies those individuals who can protect themselves from a total loss of their investment? Is the definition too restrictive and should it be loosened to allow more individuals to meet the definition? Or, should the definition be tightened to further limit the number of people who can meet the definition?
If you wish to comment, not only would we love to hear your thoughts, but also, the SEC has provided you an opportunity to formally comment on the definition here: http://go.usa.gov/ck8Z7.
If you'd like to read the SEC's complete 118 page report, you can find it here: http://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.