SEC Recommends Expanding “Accredited Investor” Definition
The SEC has recommended expanding the definition of “accredited investor” to include sophisticated investors rather than only those that qualify based on income or net worth. The staff recommends that the accredited investor definition include investors (i) with certain professional credentials including those who have passed the Series 7 or 65 exams, (ii) such as angel investors and others who have significant private investment experience; (iii) knowledgeable employees of private funds; and (iv) that pass an accredited investor qualifying examination. The SEC also recommends adding an “investments test” that would allow investors with a minimum amount invested to automatically qualify as an accredited investor, although the staff does not offer a specific amount. The SEC staff also recommends (a) leaving the current income ($200,000/year) and net worth ($1 Million) tests in place but limiting total private placement investments to 10% of those thresholds; (b) adding higher tests of income (e.g. $500,000/year) and net worth (e.g. $2.5 Million) to permit unlimited investing; (c) inflation adjusting all income and net worth tests in the future; (d) adding all entities that invest at least $5 Million.
OUR TAKE: We think the SEC staff has recommended a very practical approach to modernizing the “accredited investor” definition. The staff has considered real-world experience and balances the need for investor protection against the desire to ensure capital formation.