The SEC (Securities Exchange Commission) is convening to address the redefinition of the “Accredited Investor.” The Accredited Investor definition has remained unchanged since 1982 with exception of excluding your primary residence from your net worth, which was made after the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The Dodd-Frank Act requires the SEC to review the Accredited Investor definition once every 4 years, and 2014 is the first time they will be sitting down to do so.
The current requirements for being dubbed an Accredited Investor are that you must have a net worth of $1 million (excluding your primary residence) and/or have an annual income of $200 thousand (or $300 thousand jointly with your spouse) for two consecutive years. Essentially garnering Accredited Investor status requires that you’re measured in the preverbal 1%, and the intellect and expertise of an individual regarding investing and financial management are irrelevant.
There are several changes that the SEC is considering making to the accredited investor definition. One of the changes would be adjusting the current definition (which is based on how much money one has/makes) to correspond with inflation, since the current definition was set in 1982. Already with the current definition, only about 3-4% of the United States can qualify as an accredited investor (whom the majority don’t partake in investing).
The Vice President of the Hedge Fund Association Ron S. Geffner said, “The HFA believes that changes to the net worth requirements would fundamentally undermine the private placement market which infused nearly $50 Billion into the United States’ economy in 2013 and will materially and negatively impact small business growth by reducing the number of accredited investors in the U.S. by more than half.”
Raising the financial requirements for accredited investor status would directly cripple the small businesses that already have limited options when it comes to obtaining capital. Additionally, it would directly negate the progress that has been made under the 2012 Jumpstart our Business Startups (JOBS) Act.
Another change to the accredited investor definition that the SEC is considering would be proof of investor sophistication based on an individual’s profession and/or education. This change would be a much more plausible change to the definition, and would not undermine the JOBS Act.
As commonsense would tell you, the amount of money someone makes or has does not reflect ones intellect or investing acumen. Many financial and investment advisors make a living giving individuals investment advice, yet do not qualify as an accredited investor under the SEC’s current definition.
Under Title III of the JOBS Act, which the SEC has yet to issue the final the rules for, unaccredited investors would be allowed to invest small amounts of capital (no more than $5,000) in privately owned businesses. These final rules were due by the SEC in December of 2012 and are now almost two years late.
Whenever the SEC finally gets around to implementing Title III, they need to keep in mind implementing regulations that make is less of a burden on privately owned businesses looking for capital. If adversely change the accredited investor definition regarding financial requirements this will cut the size of the current investor pool in half.
The SEC will likely make some changes to the financial requirements for accredited investor. If they go in the direction of adding investor sophistication standards into the equation this could dry up pools of growth capital for privately owned business desperately seeking alternatives to the financial institution lending meltdown.
Hopefully the finalizing of the Title III rules will not follow far behind the changes to the accredited investor definition and privately owned businesses will see their pool of potential capital grow instead of dramatically dry up.