Accredited investor pool would expand (or shrink) under SEC advisory committee proposals

One proposed change, if adopted, would let people with a high degree of financial and investment expertise qualify as accredited investors even if they don’t meet the current definition’s threshold for wealth and income.

“The Committee believes that the Commission should develop a means for sophisticated investors to qualify as accredited,” according to a recommendation report, citing the series 7 securities license and Chartered Financial Analyst designation as possible qualifiers. “We recognize, however, that, while the logic of doing so seems obvious, finding an acceptable approach is more challenging.”

However, the committee, which is scheduled to discuss its proposals further at its Oct. 9 meeting, also criticized the current definition for its inclusion of some non-financial assets in net worth calculations. Were the SEC to remove non-financial assets it would make it less likely for an individual to qualify as an accredited investor.

“Some of their proposals would have a dramatic impact in terms of reducing the pool of available capital, and for some of the smaller private equity funds, the individual accredited investor is very important,” said Scott Gluck, counsel at Venable LLP.

If the SEC opts for a definition that continues to rely on financial thresholds, the committee recommended one that limits investments in private offerings to a percentage of assets held by investors.

While the term “accredited investor” is often applied to banks, pension funds and insurance companies, the term also pertains to individuals who have a net worth in excess of $1 million, excluding the value of a primary residence. The SEC also counts individuals as accredited who have earned $200,000 of income in each of the two most recent years and married couples who have earned $300,000 of income in each of the two most recent years.

The committee, which is comprised of the Investor Advocate, a representative of state securities commissions, a representative of the interests of senior citizens and between 10 and 20 appointees, submits recommendations that are reviewed and considered by the SEC. The SEC may or may not act on those recommendations.

The committee calls for the SEC to assess its definition of accredited investor and questions whether the definition “effectively defines a class of individuals who are able to ‘fend for themselves’” without the disclosures required of publicly registered offerings. 

In addition to recommending changes to the accredited investor definition, the committee also recommended “concrete steps (to) encourage the development of an alternative means of verifying accredited investor status that shifts the burden away” from issuers who are not equipped to do so. The committees also recommended additional protections for non-accredited investors who access private offerings through “purchaser representatives.”

The proposal would prohibit representatives from accepting payment or compensation from the issuer, and from having any financial stake in the offering.