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NASAA Opposes SEC Plan to Expand Accredited Investor Definition

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State securities regulators are opposing the Securities and Exchange Commission’s proposal to expand the definition of an accredited investor, saying the new definition would fail to adequately protect individual investors.

In a 15-page comment letter to the SEC, Christopher Gerold, president of the North American Securities Administrators Association, who also heads the New Jersey Bureau of Securities, wrote that the proposal shows “little regard for its potential adverse effects on retail investors and the public markets. The Commission should not move forward with the proposal as currently presented.”

The SEC proposal expands the number of people and organizations who qualify as accredited investors, allowing them access to private securities offerings, hedge funds and private equity funds by creating new categories of qualifying individuals and entities based on what the SEC calls their “requisite ability to assess an investment opportunity.” 

Those individuals include licensed general securities representatives (with a Series 7 license); licensed investment adviser representatives (Series 65); licensed private securities offerings representatives (Series 82); and knowledgeable employees of private funds, such as hedge funds, venture capital funds and private equity funds, even when they do not meet the income or net worth standards in the accredited investor definition. 

The entities or institutions that would qualify as accredited investors under the proposal include investment advisors — both federal and state-registered — limited liability and rural business investment companies and family offices with at least $5 million in assets under management as well as their family clients.

NASAA opposes the SEC proposal on several counts. Among its major objections:

  • It fails to adjust for inflation the income and net worth requirements for individual “accredited investors,” which were set in 1982, when the rule first took effect. They include an annual income of $200,000, or $300,000 on a joint basis, for two consecutive years and a net worth topping $1 million. In 1982, 1.6% of American households qualified under this definition; today it’s about 13%, or 16 million. ”It’s implausible that 16 million American households currently have both the financial sophistication and the capacity to bear the kinds of investment losses that courts and prior Commissions have considered essential prerequisites for participation in private offerings,” Gerold wrote.     
  • Securities exams and certifications are not sufficient criteria to assess financial sophistication. Significant relevant experience should also be required — NASAA suggests five years — along with the ability to sustain losses and the same income and net worth requirements for individuals to be considered an accredited investor.
  • There is no accounting for the impact of expanding the pool of accredited investors on the public markets nor evidence that retail investors are clamoring to invest in private offerings or that legitimate private companies are eager to sell securities to retail investors.
  • The $5 million threshold for some entities to be considered accredited investors is too low; it should be $10 million.

 NASAA suggests that before the SEC expands its definition of an accredited investor it gather data on private offerings to individual investors to better understand the types of companies and investors that reasonably should be dealing with one another.

“To deviate from longstanding standards for accredited investor status in favor of the concept offering in the Proposal would represent a significant departure from precedent  … and would likely lead to material harm for the retail investing public,” Gerold concludes.

— Check out SEC Advances Plan to Expand Accredited Investor Definition on ThinkAdvisor.