The Securities and Exchange Commission (SEC) and Small Business Capital Formation Advisory Committee (SBCFAC) have finally issued their recommendation regarding the definition of Accredited Investors. This definition impacts the Reg D marketplace, an ecosystem that enabled around $3 trillion in funding in 2023. Just about every hot startup uses Reg D to raise growth capital.
Today, an Accredited Investor is an individual who earns over $200,000 a year or has a net worth of over $1 million (not counting a primary residence). If you are married, the income threshold increases to $300,000. Only minor changes have been incorporated since the definition emerged in the 1980s.
The current leadership of the SEC wants to make it more difficult to be deemed an Accredited Investor, thus disenfranchising more investors in the US and excluding individuals from tapping into this robust market.
While everyone acknowledges that a wealth metric is not a good proxy for sophistication, chatter indicates that the SEC wants to raise this hurdle. At the same time, there are other aspects of the Accredited Investor definition, such as retirement funds, being a target of the Commission.
SBCFAC reviewed the definition this past February, where it was clear the Committee was concerned about the Commission’s intent to change the definition.
In recent days, the Committee has posted its recommendations to the SEC, and the Committee has expressed its opinion that the definition should be expanded and not curtailed. SBCFAC has told the Commission to:
- With respect to the definition of “accredited investor,” the Committee recommends that the Commission leave the current financial thresholds in place, and not adjust such financial thresholds for inflation (either retroactively or going forward).
- Given the imperfect proxy that financial thresholds provide for measuring investors’ sophistication, the Committee recommends that, for individuals who do not meet the wealth and income thresholds, there be a way to qualify as accredited by satisfactorily completing an educational program, which would then allow such person to invest up to 5% in total of the greater of their income or net worth over a 12-month rolling period. While the Committee defers to the Commission to further develop and implement these criteria, the Commission is encouraged to consider the analogous framework used in Regulation Crowdfunding.
- Having discussed the importance of investors being aware of the risks of investing in private securities, the Committee further recommends that the Commission look at ways to ensure that certain information be made available which identifies key investment risks of this asset class in a clear and concise manner. In particular, the Committee identified the following key investment risks: risk of total investment loss; limited liquidity; and that loss of investment (absent fraud) does not give an investor a legal claim against the company.
The same Committee has previously made similar recommendations that the Commission expand access to the Reg D marketplace.
Congress has also voiced an interest in making the definition more inclusive by crafting legislation to make it easier to be determined an Accredited Investor. Yet to date, no legislative proposals have been approved by Congress.
While the SEC may consider the committee’s feedback, the Commission has shown a notable tendency to ignore these recommendations.
Under the leadership of SEC Chairman Gary Gensler, changes to the definition and Reg D in general have long been a top agenda item for new rules that could undermine the US economy.
