SEC’s Report Evaluates The Definition of An Accredited Investor

The U.S. Securities and Exchange Commission (SEC) has put out a report assessing the definition of who qualifies as an accredited investor. The 2010 Dodd-Frank Act mandates that this definition be reevaluated every four years.

Accredited investors are allowed to take part in investment opportunities that are typically not available to non-accredited investors. The definition helps to identify who has the financial sophistication to get involved in such investments, as well as handle the possible risks involved in investing in hedge funds, private companies, venture capital funds, private equity funds, and other such investments.

Currently, anyone who has a yearly income over $200K or a total net worth greater than $1M is allowed to qualify as an accredited investor. (As of 2010, an investor’s main residence may no longer be included in the calculation of his/net worth.) In the report, prepared by staff from the Divisions of Corporation Finance and Economic Risk and Analysis, the Commission is asked to consider a number of suggestions, including revising the financial threshold qualifications for natural persons who meet the accredited investor definition, as well as modifying the list-based approach that allows entities to satisfy the definition. Other suggestions:

– Subject to investment limitations, keeping the current thresholds for net worth and current income as criteria for who can qualify.
– Establish new thresholds for inflation-adjusted income and net worth that are not impacted by investment limitations.
– Allow spousal equivalents to put together their money to qualify as accredited investors.
– Modify the accredited investor definition as it applies to entities by using a $5M investments test instead of a $5M assets test.

The report also asks the SEC to modify the definition of an accredited investor so that individuals may qualify on other grounds beyond income and net worth, including: persons who have a minimum amount of investments, certain professional credentials; experience in exempt offering investments; employees of private funds wanting to invest in said funds; or individuals who are able to pass specific exam to qualify as an accredited investor.

The Jump-start Our Business Start-ups Act (JOBS Act) is a main impetus for tightening the qualification for who can be considered an accredited investor. The JOBS Act lets private funds publicly advertise and market their business, and some in the industry are worried of potential fraud incidents in the wake of the recent passing of the act.

In other SEC news, the regulator is seeking public comment on its proposed new transfer agent rules, and it voted to put out an advanced notice of the proposed rule making. In a statement, SEC chairwoman Mary Jo White spoke about how the rules for transfer agents need to be updated to make sure that markets and investors are served properly. Also, the SEC has just put out two yearly staff reports on credit rating agencies that are registered as NRSROs—nationally recognized statistical rating organizations.

According to the report, NRSROs have improved process accountability, operations, governance and controls. The report also touches upon new NRSRO requirements that went into effect last year. The requirements deal with conflicts of interest, internal controls, better transparency of credit ratings, disclosure of credit rating performance statistics, and enhanced standards.

The SSEK Partner Group is an institutional investor fraud law firm that represents high net worth individuals and institutional clients.

Read the SEC Report on the Accredited Investor Definition (PDF)

SEC Seeks Public Comment on Transfer Agent Rules, SEC, December 22, 2015

Read the SEC Report on Credit Rating Agencies (PDF)