Last week the SEC’s Small Business Capital Formation Access Committee met and one of the topics reviewed was the definition of an Accredited Investor. Once again, the Committee determined that the current definition is too restrictive, voting on expanding the definition to make it more inclusive and accessible.
Currently, the definition allows certain individuals to qualify to participate in private securities offerings under Reg D, the securities exemption that many promising young firms use to raise growth capital. Today, individuals must earn over $200,000 a year or have a net worth of $1 million. If married, the income hurdle increases to over $300,000 a year. This means only affluent individuals may participate in these s securities offerings thus disenfranchising most of the country. At the same time, everyone knows that wealth hurdles are not a good metric for sophistication or gauging the ability to determine whether or not an investment is suitable for an individual.
Just prior to the meeting, the Small Business Investor Alliance (SBIA) submitted a comment letter advocating for broadening the definition to enable more individuals to participate in this market. The SBIA noted that the SEC Office of the Advocate for Small Business Capital’s annual report included recommendations as to how to expand the definition, noting that the “discriminatory impact that the current definition can have, given that a higher percentage of racially and ethnically diverse individuals are excluded from being accredited investors.”
The SBIA slammed the Commission stating that unfortunately the SEC is “considering further restrictions to the pool of accredited investors.”
The SBIA said that it “strongly supports” additional methods to determine if an individual should be deemed accredited like understanding the risks, as well as well as the rewards to investing in private securities including alternative investment products and small private funds.
“For nearly 40 years, the only way most investors could achieve accredited status was through earning a minimum level of annual income or having a minimum net worth. In practice, these thresholds allowed only wealthier individuals to invest in private offerings or other vehicles, regardless of an investor’s financial sophistication, level of education or professional certification, or their ability to understand complex products.”
The Commission has had changes to Reg D and the definition of an Accredited Investor as a top agenda item since the beginning of Chairman Gary Gensler’s tenure. While many individuals and groups have told the Commission to make the current definition less discriminatory, many insiders expect the Commission to do the exact opposite and make it more challenging for individuals to become qualified as Accredited.