Currently, the SEC defines an accredited investor a someone who either has an income of at least $200,000 ($300,000 for couples) or a net worth of at least $1 million, without including the individual or couple’s primary residence. Some feel that this definition is archaic and poorly suited to prevented “unsophisticated” investors from making unsuitable investments.

These proponents of a rule-change argue that financial thresholds do not give enough protection to investors whose net worth is based on retirement savings or non-liquid holdings. They would like to see the SEC upgrade the definition in such a way that expands the potential pool of investors and reinforces verification that they qualify.

In 2012, the SEC estimated the private placement market to be about $1.6 trillion. That number has assuredly risen since then, meaning that much money is at issue here.

The SEC is certainly making attempts to change the definition. A couple of weeks ago, all except one member of the SEC Investor Committee voted to suggest that the SEC throw out the income and net-worth floors and rather consider a definition of a sophisticated investor that bears in mind a person’s education, professional credentials, and experience in investing.

The committee is also considering the creation of a financial-sophistication test. The committee has stated that if the SEC decides that to keep income and net-worth criteria, the SEC should limit participation in private placements to a particular percentage of an investor’s income or assets.

The committee additionally suggested that responsibility for verifying accredited investor status move from securities issuers to third parties. These third parties may include brokers, investment advisers, accountants, and attorneys.

Proponents of a new rule assert that creating a fresh standard to decide whether a person can and should invest in private placements will tremendously help prevent those who can least afford serious losses safe from financial ruin.

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.