Securities and Exchange Commission Chairwoman Mary Jo White reiterated Thursday that the agency is taking a “comprehensive review” of potential changes to the accredited investor definition, but SEC Commissioner Daniel Gallagher said such an endeavor “strains logic and reason,” and that “millionaires can fend for themselves.”
Both White and Gallagher made their remarks during the Government-Business Forum on Small Business Capital Formation, held at SEC headquarters in Washington. The forum delved into whether changes need to be made to the accredited investor definition as it relates to natural persons. White stated that the SEC’s goal is to “assess whether we are properly identifying the population of investors who should be able to purchase securities in a securities offering without the protection afforded by the registration requirements of the Securities Act.”
But Gallagher said during the forum that he’s “baffled by continued insistence from some quarters that we need to significantly revise” the accredited investor definition.
“Why should we spend limited Commission resources ‘protecting’ the wealthiest 2 percent to 3 percent of investors in this country?” he asked. “This obsession with ‘protecting’ millionaires — potentially at the cost of hindering the wildly successful and critically important private markets — strains logic and reason. Millionaires can fend for themselves.”
Gallagher noted that the Dodd-Frank Act’s removal in 2010 of the value of the primary residence for purposes of the net worth test “was already a significant change to the accredited investor definition,” and that “additional government paternalism could also negatively impact the availability of capital for small companies is a double whammy, and rather than pressing our luck, we should be yelling ‘stop’ — and instead spend our time focusing on actually facilitating capital formation.”
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; 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.
Rachita Gullapalli, a financial economist in the SEC’s Division of Economic and Risk Analysis, noted on a panel discussion that the $200,000 threshold set in 1982 when adjusted for inflation would be about $492,000 today, while the $300,000 threshold would be around $620,000. The joint income threshold of $1 million when adjusted for inflation today would be about $2.4 million, she said.
In mid-October, the SEC’s Investor Advisory Committee approved five recommendations for the agency to consider, including a provision to allow investors to qualify based on their “financial sophistication” and not just their net worth. The committee also wants educational requirements and designations to be considered.
Stanley Keller, a partner at Edwards Wildman Palmer LLP in Boston, who moderated the Thursday panel with Keith Higgins, director of the SEC’s Division of Corporation Finance, said the challenge in deciding whether to modify the definition is “balancing investor protection and enhancing capital formation. …How do you strike the right balance between these two considerations? If you tighten [the definition] it lessens the pool of eligible investors, but if you expand it, there could be investor protection issues.”
Panelists on Thursday agreed that financial sophistication — and not boosting the net worth requirement — would be an acceptable addition to the definition.
But Donald Langevoort of Georgetown University Law Center in Washington, said that he would “raise the [income] threshold a bit, but not by much.”
Jean Peters, a board member of the Angel Capital Association and managing director of the Golden Seeds Fund LP, noted that ACA believes the definition “should not be changed, as far as financial thresholds.” However, she said, ACA believes “sophistication is key,” and that adding a sophistication element to the definition would be “good.” She questioned, however, how such status could be verified. “Maybe a qualifying questionnaire?”
A. Heath Ashure, Arkansas Securities Commissioner, half joked that he would not even meet the accredited investor financial thresholds. What the states want, he said, “is a test that measures sophistication but doesn’t place an undue qualifying standard” on the investor.