Section 413 of the Dodd-Frank Act requires the Securities and Exchange Commission to review the accredited investor definition by July 21, 2014, the fourth anniversary of President Obama’s signing of the law. In a letter to Congressman Scott Garrett, SEC Chair Mary Jo White said that the Commission staff has begun a comprehensive review of the accredited investor definition. The letter was specifically a response to questions from Congressman Garrett.
I have no doubt that the current definition of accredited investor using income or net worth for individuals excludes people who should not be excluded from private securities offerings. I also have no doubt that it also allows in people who are not financially sophisticated enough to analyze the investment opportunity. For example, the SEC Commissioners fail the income test based on their salaries as commissioners. (I have no doubt they meet the net worth test.)
I do like the clear line drawn by the standard. I also like that a company can use reasonable belief to rely on questionnaire submitted by the investor to prove its accredited investor standard.
The new standards imposed by the SEC to verify accredited investor status under the permitted general solicitation are causing many to avoid that option. Few individuals are going to want to supply tax returns or W-2s to make an investment opportunity.
In reading the questions asked by Congressman Garrett it seems clear to me that he wants the definition expanded to create a larger pool of potential investors.
The GAO report on the accredited investor standard highlights net worth as the most important measure of an investor for private placements. The report has some great analysis of potential changes to the standard.
The deadline is still months away, but I expect there will be significant changes to the definition.
- SEC Chair White Explains Staff Study of Accredited Investor Definition to Rep. McHenry
- Letter describing possible changes to the definition of accredited investor
- Alternative Criteria for Qualifying As An Accredited Investor Should Be Considered
GAO-13-640, Jul 18, 2013
- SEC Chair Mary Jo White Outlines Potential Changes to “Accredited Investor” Definition (.pdf)