SEC Advisory Committee Issues Accredited Investor Recommendations
The SEC recently release advisory committee recommendations for updates to the definition of “accredited investor,” other issues related to accredited investors, and recent updates to the securities laws. For years, there has been concern over the definition of accredited investor—specifically whether the financial thresholds are outdated—and whether changes to the definition would narrow the number of accredited investors, which could significantly reduce access to capital for startups and established private companies. The committee’s most recent recommendations do not include a higher financial threshold, but they do include a number of other recommendations and propose analysis of whether the threshold should be increased.
Highlights from the Committee’s Recommendations:
Does the definition of accredited investor accomplish its goal?
The first recommendation looks at whether the current definition of “accredited investor” accurately identifies a class of people that do not need the protections of the Securities Act of 1933. The committee suspects that a large portion of “accredited investors” under the current definition actually need protection, because they are not capable of protecting their own interests. And if this is the case, the committee recommends revising the definition to better accomplish its goal.
Add “financial sophistication” to the accredited investor analysis
The committee recommends updating the definition to allow individuals to invest even if they do not qualify as accredited investors under the financial thresholds, as long as they have sufficient “financial sophistication.” The committee acknowledged that developing a set of rules that allows certain individuals that do not meet the financial thresholds to qualify as accredited investors is problematic. Three possible solutions offered by the committee are:
- Allow individuals with certain professional credentials, such as a series 7 securities license or CFA designation, to be considered accredited investors despite not meeting the financial thresholds;
- Allow individuals with significant investment experience to qualify as accredited investors—although the committee acknowledged that developing the test for “significant investment experience” may be difficult; or
- Develop a rigorous test that individuals can take to qualify as accredited investors.
Adjust calculations for financial thresholds
If the SEC chooses to continue to rely heavily on the financial thresholds for defining accredited investors, then adjustments should be made to better protect investors without significantly decreasing the number of investors. One example is to limit investments in private offerings to a percentage of the investor’s assets or income.
Shifting burden of verifying investors
The committee recommends the development of alternative means of verifying accredited investors in order to shift the burden away from the issuer. In many cases, the issuer is not well positioned to verify investors. As the definition of accredited investor evolves and becomes more complex, the issuer’s ability to accurately verify its investors decreases.
Strengthen protections for non-accredited investors
The committee recommended increasing the protections when non-accredited investors are included in a private offering. Specifically, the committee recommended that the SEC prohibit individuals who are acting as representatives for the purchaser to have any financial stake in the investment being recommended, prohibit the purchaser representatives from accepting compensation from the issuer, and require the purchaser representatives that are compensated by the purchaser to acknowledge fiduciary duties to act in the best interests of the purchaser.