NSBA Comments on Accredited InvestorMarch 30, 2016
On March 29, NSBA submitted comments to the Securities and Exchange Commission (SEC) regarding potential changes to the agency’s definition of “accredited investor.” This is important because qualifying as an accredited investor allows an investor to easily participate in small business securities offerings. In December 2015, the SEC released a report in which it examined potential changes to the definition which it was considering making. The current comment period is not part of an official rulemaking and any changes that SEC ultimately decides to make will be subject to notice and comment rulemaking procedures at a later date.
The SEC report recommends a number of potential changes to the accredited investor definition. Under the current definition an accredited investor must have either an income in excess of $200,000 or a net worth of over $1 million. This essentially limits accredited investor status to the very wealthy and results in a relatively small pool of potential investors for small businesses.
NSBA has long advocated expanding this definition to more accurately encapsulate those with the sophistication to responsibly invest in small businesses. Some of the recommendations made in the report are consistent with this position. However, other recommendations would limit and complicate the definition. If implemented, the recommendations made in the report would create two tiers of accredited investor, one with an investment cap and one without, and they would raise the financial thresholds for the definition. Recommendations in the report more consistent with NSBA’s position would create alternative methods for assessing an investor’s ability to invest in these offerings and expand the definition.
NSBA’s comments emphasize that a tiered approach to the definition would drastically increase the complexity of the regulations and make compliance much more difficult. As stated in our comment letter, NSBA is generally supportive of recommendations which would look to other metrics besides income and net worth to determine an investor’ qualification. For example, the report discusses using an investor’s professional credentials or experience in these types of offerings as qualifying metrics under the definition, which would expand the pool of potential accredited investors. NSBA supports these types of changes which recognize that wealth and income are not the only factors which should be used to determine who qualifies as an accredited investor.
Small business securities offerings are incredibly important to the small-business community, and represent an enormous amount of the capital raised by small businesses. As such, who qualifies as an accredited investor and may easily participate in those offerings, is of paramount importance to the community. While, inarguably carrying greater risk, investment in small businesses also carries the potential for significant gains, and those potential gains should be available to everyone who can responsibly invest not just the very wealthy.