The SEC issued a report evaluating the definition of “accredited investor” as part of its obligations under the Dodd-Frank Act. Perhaps most significantly, the report recommends modifications to the definition that could drastically change capital fundraising and the ability for issuers to rely on exemptions from registering their securities offerings.

Currently, accredited investors are defined as those natural persons whose income exceeds $200,000 individually or $300,000 jointly with their spouses for the two most recent years and who reasonably anticipate income to remain constant in the current year; those natural persons whose net worth exceeds $1 million, excluding the value of their primary residence; and certain entities with assets exceeding $5 million.

Financial Threshold Recommendations

The report suggests that the SEC consider one or more of the following recommendations as related to the required financial thresholds for individuals or entities to qualify for “accredited investor” status:

  • Impose investment limitations on the current income and net worth thresholds, such as limiting investments made in a 12-month period to 10% of an individual’s net worth or 10% of his or her prior year’s income;
  • Increase current income and net worth thresholds to adjust for inflation, such as $500,000 minimum income for individuals ($750,000 jointly) or $2.5 million in net worth, without imposing investment limitations;
  • Index all financial thresholds for inflation on a going-forward basis every four years;
  • Add the term “spousal equivalent” to the definition to allow individuals in marriages, civil unions, and domestic partnerships to pool income in order to satisfy income thresholds;
  • Permit any entity, not just the current enumerated list, with at least $5 million in “investments” to be an accredited investor. “Investments” to be defined in the same manner as SEC Rule 2a51-1(b) under the Investment Company Act, which is used in other contexts to determine whether an investor will be a “qualified purchaser.” Also considers replacing the current assets-based test with an “investments” test for all entities;
  • Grandfather issuers whose investors are currently accredited to maintain their status in future offerings in such issuers’ securities.

Non-Financial Threshold Recommendations

The report further suggests that the following non-financial attributes be considered as a way of qualifying certain sophisticated individuals whose income does not otherwise meet financial thresholds to nonetheless invest in private offerings:

  • Minimum Investment Amounts: While no specifics are recommended, the report suggests considering a minimum amount of investments made by an individual as a way to evaluate such person’s ability to evaluate and weather financial risk;
  • Professional Credentials: Individuals who possess certain professional credentials, such as having passed the Series 7, Series 65, or Series 82 examination, are recommended as sufficiently sophisticated to qualify for the definition;
  • Past Investment Experience: The report suggests considering past investment experience in determining investor sophistication, such as the investment in at least ten private offerings by different issuers;
  • Knowledgeable Employees of Private Funds: The report recommends including knowledgeable employees of private funds as accredited investors due to their experience with investment decisions on a consistent basis;
  • Accredited Investor Exam: Lastly, the report suggests creating an examination to objectively evaluate an investor’s ability to appreciate the risks associated with investments, with those passing qualifying for “accredited investor” status.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.