The SEC should consider alternative criteria for its accredited investor standard, including the use of more liquid investments inside any Reg D private offerings, or require the guidance of a registered investment advisor, according to a just-released report by the Government Accountability Office.
In addition to research with regulators and associations here and abroad, GAO surveyed 27 “market participants” in its study — including RIAs, broker-dealers, securities attorneys and accredited investors themselves — to determine what would be most effective in protecting investors while also encouraging capital formation in private vehicles. Among the options presented to study participants but rejected as unworkable by the GAO were a “self-certification investor designation,” an “investor sophistication test” and an investor education requirement.
However, what would be effective, the study found, would be the use of an RIA, suggesting that an accredited investor “who wishes to invest in a private placement offer” be required “to use the services of a registered investment adviser to manage their investment accounts.”
The report was delivered yesterday to the Senate Banking, Housing and Urban Affairs Committee and its chairman, Tim Johnson (D-S.D.), and the House Financial services Committee and its chairman, Jeb Hensarling (R-Texas).
As it stands now, to meet the accredited investor standard the SEC requires an investor to have an annual income of more than $200,000 ($300,000 for a married couple) or a net worth of more than $1 million, excluding the investor’s primary residence. The thresholds were set in the 1980s and 2010, but the Dodd-Frank Act mandated that GAO study the criteria for qualifying individual investors as accredited.
GAO analysis of federal data on household net worth showed that adjusting the $1 million minimum threshold to approximately $2.3 million, to account for inflation, would decrease the number of households qualifying as accredited from approximately 8.5 million to 3.7 million.