SEC Commissioners Debate "Accredited Investor" Definition (with Lofchie Comment)

At the SEC's December 2014 Meeting of its Advisory Committee on Small and Emerging Companies (the "Committee"), regulators discussed the definition of "accredited investor," among other topics.

Chair White stated that the focus of the Committee meeting was to review the "accredited investor" definition "to assess whether we are properly identifying the population of investors who should be able to purchase securities in offerings without the protections afforded by the registration requirements of the Securities Act."

SEC Commissioner Aguilar spoke about the "urgency and importance" of improving the definition, stating that "the single working parent with three children, the widow with the inheritance, and the retiree all deserve the Commission's attention to make sure they are not made more vulnerable by an 'accredited investor' definition that may fail to distinguish between individuals who can protect their own interests and those who cannot." On the other hand, he stated, the current definition "may be under-inclusive," adding that the Investor Advisory Committee has recommended changes to the definition, including assessing an individual's specialized work experience and investment experience, licensing, or other professional credentials.

In answer to the question he posed to himself – "Am I refusing to consider a potential expansion of the pool of accredited investors to learned professionals and others . . . ?" (emphasis in original) – Commissioner Gallagher explained that "'[r]efusing' is a strong word – let's just say that I'm extraordinarily skeptical." He added that he worries about the government becoming "more deeply involved in defining who is sophisticated and who is not."

Commissioner Gallagher said that if it did not involve a more intrusive governmental role, or a possible cutback in the number of accredited investors or investible assets, he would be open to discussing the change to the "accredited investor" definition. However, he added, he has seen "no indication that would be the case."

Lofchie Comment: The debate over whether "accredited investor" status should take knowledge or intelligence into account is interesting from the standpoint of both policy and practicality. Commissioner Aguilar stated the following in his remarks: "studies have shown that accumulating financial wealth is not necessarily correlated with intelligence. . . . One finance professional has found that 'there are often people whose net worth puts them in the accredited category. They may be smart and successful in their fields, but most are confused about the basics of investing and managing money.'"This seems to argue that wealth should not be a major criterion in determining accredited investor status. While that may be true in theory, it would be difficult for the government to administer tests of investors' intelligence. How would the fairness of the test be determined? How would the government respond if different segments of the population had different "pass" rates? Would the government conclude that a college education makes an investor smarter than would a plumber's license (notwithstanding the contrary view of Warren Buffett)?In light of the above concerns, and in acknowledgement of the theoretical merits of Commissioner Aguilar's views, this quote from Commissioner Gallagher should suffice: "Having the SEC place its imprimatur on certain forms of education or training, and not others, is a dangerous path."

See: Chair White's Opening Remarks; Commissioner Aguilar's Remarks; Commissioner Gallagher's Remarks. Related news: SEC Announces Agenda for Meeting of Advisory Committee on Small and Emerging Companies (December 11, 2014); SEC Holds Investor Advisory Committee Meeting (with Delta Strategy Group Summary) (October 9, 2014).