SEC Reviews ''Accredited Investor'' Definition Relating to Natural Persons

Steven Lofchie Commentary by Steven Lofchie

The SEC Divisions of Corporation Finance and Economic and Risk Analysis analyzed various approaches for modifying the definition of an "accredited investor." Under the Dodd-Frank Act, the SEC must review this definition as it applies to natural persons every four years.

The Divisions' recommendations for methods to revise the definition included:

  • The SEC should revise the financial thresholds requirements and the list-based approach for entities as follows:
    • leave the current income and net worth thresholds in place, subject to investment limitations;
    • add new inflation-adjusted income and net worth thresholds that are not subject to investment limitations;
    • index all financial thresholds in the definition for inflation on a going-forward basis;
    • permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors;
    • revise the definition, as it applies to entities, by replacing the $5 million assets test with a $5 million investments test, and include all entities rather than limited specific types of entities; and
    • permit issuers' investors that are accredited investors under the current definition to be grandfathered with respect to future offerings of the issuers' securities.
  • The SEC should allow individuals to qualify based on other measures of financial sophistication:

    • permit individuals with a minimum amount of investments to qualify as accredited investors;
    • permit individuals with certain professional credentials to qualify as accredited investors;
    • permit individuals with experience investing in exempt offerings to qualify as accredited investors;
    • permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer's funds; and
    • permit individuals who pass an accredited investor examination to qualify as accredited investors.

Commentary

On first blush, the notion of a written examination to test status as an "accredited investor" seems an eccentric one. But as the SEC's report points out (at page 65), there are a good number of examinations already in use for professional licensing that could be good starting points. As numerous studies have shown, the level of financial knowledge in this country is remarkably low. As a result, the level of public discussion over how to regulate the businesses that drive the economy suffers. This may contribute not only to bad investment decisions, but also to bad law. While it is wishful thinking that an "accredited investor" test could provide some large benefits in the form of the financial education of the public as a whole, or investors in particular, perhaps it will at least provide some small benefit.

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