SEC's Review on the Definition of an Accredited Investor

Dacxi Chain
4 min readFeb 21, 2024
crowdfundinsider

The staff of the Securities and Exchange Commission (SEC) has issued a report that reviews the definition of an Accredited Investor.

In brief, an Accredited Investor is someone who earns over $200,000 a year or has a net worth of over $1 million — not counting a primary residence. If you are married, that income hurdle jumps to $300,000. Accredited Investors may participate in certain private securities markets, most importantly Reg D offerings. This market is enormous and measured in trillions of dollars annually. Many of the most successful public firms first raised capital by leveraging this securities exemption.

Recently, the definition was expanded slightly to allow for certain professional certifications or designations (like a Series 7). But still today, it is largely exclusionary, disenfranchising the vast majority of the US population.

The staff document does not deliver a grand conclusion but acknowledges the Commission is reviewing a potential update.

While most people understand that a wealth metric is not the best metric to determine Accredited status, the SEC has been slow to expand the definition to provide a sophisticated path that recognizes acumen. In fact, most observers expect the Commission to make the hurdle higher in gaining Accredited status. An update to Reg D and the definition of an Accredited Investor has been a top ten item on the SEC’s regulator agenda during the tenure of Chair Gary Gensler.

Update: It appears the SEC is leaning heavily toward removing retirement accounts as part of the equation for qualifying as an Accredited Investor, and a good portion of the paper discusses indexing the income and wealth metrics to inflation — either from when the definition was established or starting now. One insider described the Review as a “shot across the bow” in regard to tightening the definition further and excluding more of the population from this robust market.

The document highlights how the definition would change if retirement accounts (IE IRAs) were removed. The number of households deemed to be Accredited (over $1M of net worth) would go from 16.44 million to 11.6 million. The thesis is that many people who hold IRAs lack the sophistication to participate in Reg D offerings.

As for a possible sophistication qualification, the document appears to be dismissive of this option — even though many individuals and some members of Congress — have called for this option.

The authors lean heavily on comments from state regulators, a group that has always favored more aggressive regulation. The Review states:

“state securities regulators, stated that the current accredited investor definition is over-inclusive, encompassing individuals who may not be able to bear the risk of loss of their investments or who are not in a position to access the information needed to assess the risk of their investments, because the financial thresholds contained in the definition have not been adjusted for inflation or because the net worth calculation includes certain assets, such as retirement accounts, that should be omitted.” [emphasis added]

And;

“In addition, in 2023, NASAA recommended that the Commission amend the accredited investor definition to: 1) exclude from the net worth calculation assets accumulated or held in defined contribution plans and 2) adjust the income and net worth thresholds to account for inflation since 1982 and index the thresholds to inflation on a go forward basis.”

The document ends by stating:

“We are interested in the public’s views regarding the matters discussed in this review. We welcome all feedback and encourage interested parties to provide feedback on any or all topics of interest.”

But these are empty words as the Commission has consistently ignored the requests of groups like the SEC Small Business Capital Formation Advisory Committee (SBCFAC), which has called on the Commission to expand the definition. A recent statement at the SEC by the Angel Capital Association (ACA) cautioned indexing could eliminate a large portion of Angels. As for fraud, the ACA said there is little to no fraud in their experience. There is no mention of this in the Review.

In the end, the Commission will solicit feedback and do what it wants. The current leadership of the Commission is heavy on a rule-upon-regulation approach to the markets in what seems to be an effort to remove all risk for investors. And then there is the fact there is no public outcry demanding the Commission act to make participating in private offerings more difficult — if anything, there is a strong voice of engaged individuals who want to expand opportunities for investors and stop disenfranchising the majority of the population.

Source: https://www.crowdfundinsider.com/2023/12/218235-sec-publishes-review-on-definition-of-an-accredited-investor/

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