SEC Reviews “Accredited Investor” Definition

January 20, 2016

pic-money-budgetIn Dec. 2015, the Securities and Exchange Commission (SEC) released a staff report recommending changes to the thresholds and definitions for “accredited investors.” The definition is important to small businesses because only accredited investors are allowed to invest in small businesses in some situations. SEC is currently accepting comments on the report as well as the recommended changes to the definition.

If you would like to submit your own comments, here is the appropriate link. NSBA will also be submitting comments and is seeking feedback and input from our members. To share your thoughts with NSBA staff, please click here. NSBA is specifically requesting member comments on the suggestions made in the report, particularly on the thresholds recommended for unlimited investment, the potential impact on overall funds available, alternative ways to measure investor sophistication, and potential ways to address the geographic disparity. Please submit your comments by Jan. 27.

Currently, approximately 10.1 percent of American households meet the definition for “accredited investors.” The report estimates that the changes recommended by the staff would slightly increase that number to 11.5 percent. However, one area not considered by the report was how to address the geographic disparity between regions with regard to the amount of qualifying accredited investor households. Another issue not covered by the report is the impact the recommended changes would have on the overall amount of funds available to small businesses, not just the number of accredited investor households.

Below are several key recommendations made in the report.  Report Recommendations:

  • Financial Thresholds:
    • The Commission should revise the financial thresholds requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors.
      • Leave the current income($200,000) and net worth ($1 million) thresholds in place, subject to investment limitations. The SEC staff used 10 percent of prior year income or 10 percent of net worth as examples of those limitations.
      • Create new, additional inflation-adjusted income and net worth thresholds that are not subject to investment limitations. The staff recommended thresholds of incomes of $500,000 for individuals and $750,000 for joint income and $2.5 million for net worth.
        • Index all financial thresholds for inflation on a going-forward basis.
      • Permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors.
      • Revise the definition as it applies to entities by replacing the $5 million assets test with a $5 million investments test and including all entities rather than specifically enumerated types of entities.
      • Grandfather issuers’ existing investors that are accredited investors under the current definition with respect to future offerings of their securities.
  • Definition:
    • The Commission should revise the accredited investor definition to allow individuals to qualify as accredited investors based on other measures of sophistication rather than simply income and net worth.
      • Permit individuals with a minimum amount of investments to qualify as accredited investors.
        • A specific amount wasn’t given.
      • Permit individuals with certain professional credentials to qualify as accredited investors.
        • The report used passing Series 7, 65 and 82 examinations as examples.
      • Permit individuals with experience investing in exempt offerings to qualify as accredited investors.
      • Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer’s funds.
      • Permit individuals who pass an accredited investor examination to qualify as accredited investors.

NSBA supports revising the definition of “accredited investor” as it currently unnecessarily limits the amount of capital available to small businesses from those willing and capable of investing in them. With the current shortage of traditional lending for small businesses, alternative methods of capital formation such as investments from accredited investors are becoming increasingly important. NSBA believes that any  revision to the definition should ensure that those willing and reasonably capable of investing in America’s small businesses are not barred from doing so.