The SEC’s Investor Advisory Committee on Thursday recommended five updates to the Commission’s decades-old accredited investor definition, including a provision to allow investors to qualify based on their “financial sophistication” and not just their net worth.
Barbara Roper, who heads the advisory committee’s Investor as Purchaser Subcommittee, said during the Committee’s meeting held at SEC headquarters in Washington that the recommendations include “several significant changes” from those discussed at the Investor Advisory Committee’s July 10 meeting.
The Committee’s proposal, which Roper, who is also director of investor protection at the Consumer Federation of America, said was a product of “a lot of back and forth” between the Investor as Purchaser and Investor Education subcommittees, applies to “natural persons” under the SEC’s accredited investor definition, not institutional investors.
“When Congress removed the ban on general solicitation” under Rule 506 offerings under Regulation D, Roper said, the accredited investor definition “divide in the public and private markets became more important.”
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SEC Chairwoman Mary Jo White told reporters after the meeting that the SEC’s Division of Corporation Finance has been performing a ”deep dive” into the accredited investor definition. White said she was “very impressed” with the Investor Advisory Committee recommendations, adding that the agency is ”in the process of making real progress on all of the issues that you see addressed in [the committee's] recommendations today.”
The Committee offered five recommendations.
1: The SEC should carefully evaluate whether the accredited investor definition, as it pertains to individual people, is effective in identifying a class of individuals who do not need the protections afforded by the Securities Act of 1933.
The current definition’s financial thresholds, which haven’t been updated since 1982, “serve as an imperfect proxy for sophistication, access to information and ability to withstand losses,” the Committee’s recommendation said.
Roper noted the ongoing debate regarding whether to raise the thresholds. “We have concerns about the current definition,” she said, but the Committee is offering “ways to solve it in ways that don’t involve raising the thresholds and constraining private offerings.”
The Committee noted that if, as it expects, the SEC’s analysis reveals that a “significant percentage” of individuals who currently qualify as accredited investors are not in fact capable of protecting their own interests, the Commission should initiate rulemaking to revise the definition to better achieve its intended goal.
However, the Committee argued in its first recommendation that the SEC “not simply make a binary decision over whether or not to adjust the thresholds to reflect inflation.”
As it stands now, a natural person who qualifies as an accredited investor is 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 their primary residence.