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House OKs Broader Definition of ‘Accredited Investor’

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A bill passed Feb. 1 by the U.S. House of Representatives would expand the definition of “accredited investor” to include a knowledge and education category.

The definition of accredited investor determines which investors are allowed to participate in private securities offerings not registered with the Securities and Exchange Commission.

The Fair Investment Opportunities for Professional Experts Act (H. R. 2187), which was introduced by Rep. David Schweikert, R-Ariz., in April, passed by a vote of 347 to 8, and is now under consideration by the Senate Committee on Banking, Housing and Urban Affairs.

The House bill expands the list of accredited investors to include the following individuals, whether or not they meet income or net worth requirements:

  • Brokers or investment advisors licensed or registered with the SEC, the Financial Industry Regulatory Authority or other self-regulatory organization, or any state regulatory authority
  • Any other natural person the SEC determines by rule to have professional knowledge related to an investment and whose education and job experience is verified by FINRA or another self-regulatory body

The bill also incorporates income and net worth requirements for natural persons found in the SEC’s Rule 501(a) of Regulation D, and adds language requiring the agency to adjust these dollar thresholds for inflation every five years, based on the Consumer Price Index. 

Rules 501(a)(5) and 501(a)(6) provide that accredited investors are individuals with a net worth of more than $1 million (excluding the value of their primary residences), and those with an individual income greater than $200,000 in each of the two most recent years (or joint income with their spouses in excess of $300,000) and with a reasonable expectation of reaching the same income level in the current year.

Updating the accredited investor definition has been a priority for both Congress and the SEC since the passage of the Dodd-Frank Act. 

Under Dodd-Frank, the SEC is directed to review the definition as it relates to natural persons every four years. The agency released an official report in December that included 11 possible revisions to Rule 501(a). 

An analysis of the House bill by the law firm Lowenstein Sandler noted that H.R. 2187 reflected the House’s impatience with the SEC’s failure to revise the accredited investor definition to increase the potential pool of investors for the private placement market. The House also wanted to prevent the SEC from imposing any restrictions that would constrict that pool. The bill codified the current income and net worth thresholds to preclude the SEC from amending the definition of accredited investor to either increase the financial thresholds or impose restrictions on the amounts individuals meeting those thresholds may invest.

The analysis pointed out that the House had rejected the view that the financial thresholds should be increased to prevent fraud against investors who may be unable to fend for themselves.

It based this rejection in part on the SEC’s report, which said there was no “substantial evidence suggesting that the current definition of accredited investor has contributed to the ability of fraudsters to commit fraud or has resulted in greater exposure for potential victims.”

Last week, the Hedge Fund Association, a nonprofit organization that represents investors, hedge funds and service providers, said the bill provided a practical update to the current definition, while promoting capital formation.

“HFA will continue to support reasonable changes by Congress and the SEC to the accredited investor definition, and the private offering exemptions in general, provided such changes enhance investor protection and promote capital formation without further limiting investor access to alternative investment funds,” Mitch Ackles, the group’s president, said in a statement.

HFA said it had encouraged the SEC to make “sensible changes” to the accredited investor definition, and avoid revisions that would disrupt the capital markets.

— Check out SEC Has ‘Open Investigations’ of Private Offerings to Accredited Investors on ThinkAdvisor.