Accredited investor status opens the door for particular qualified investors to participate in numerous private security offerings. The current qualifications for individual accredited investors mainly involve two requirements, either one which must be satisfied. The first is the income requirement, in which an investor must have more than $200,000 in income in each of the previous two years, or $300,000 with a spouse, and expect to earn the same amount in the current year. The second is the net worth requirement in which an investor must have more than $1 million of net worth, either individually or jointly, not including the value of the primary residence.
The SEC recently concluded its comment period on its concept release seeking input on the existing complex assortment of its rules regarding exemptions. An important part of the Commission’s request for comment was the accredited investor definition.
If the SEC modifies the accredited investor definition, it will need to address a number of issues in 2020. These include:
The Wealth Criteria
When it comes to accredited investor status, the wealth criteria that has been set by the SEC plays a big role in determining who falls under this category. The $200,000 income requirement and the $1 million net worth requirement have not been modified since 1982, other than removing the primary residence of the investor from the net worth calculation per the Dodd-Frank Act. The number of accredited investors who qualify this way has increased significantly since the 1980s, in part due to inflation.
Additional Measures
One issue to be evaluated is whether wealth alone should be linked so closely with investment sophistication. Should the SEC continue to determine the accredited investor status based on financial measures alone? In determining whether an exemption is appropriate, is the ability of the investor to absorb a financial loss an appropriate measure of sophistication?
The SEC will need to consider factors such as access to information, financial sophistication, and expertise as it determines whether it should modify the accredited investor definition. For example, should certain individuals with financial industry licenses, or those who are certified financial planners or other law analysts, be considered accredited investors?
The Future Outlook
We may see the SEC take action to broaden the accredited investor definition in 2020. However, only time will determine if any of the changes if made will produce the desired and anticipated results in the marketplace.
