Taskforce aims to update 'accredited investor' standard

As part of a review of the “accredited investor” definition, the Investor Advisory Committee (IAC) of the US Securities and Exchange Commission (SEC) proposed several recommendations to redefine the term “accredited investor” in order to better protect vulnerable investors without constraining the pool of capital available for private offerings.

For investor protection purposes, GPs are not able to solicit commitments from investors who do not meet the accredited investor definition.

Currently, an accredited investor is defined as someone who is worth $1 million (not including his or her house), who earns $200,000 a year, or has a household income of $300,000. These financial thresholds serve as “an imperfect proxy for sophistication, access to information, and ability to withstand losses,” according to an October 9 report by the IAC.

One recommendation by the committee entails adjusting the requirements, which were set in 1982, for inflation. The adjustment would bring the income thresholds to just under $500,000, or $740,000 per household, and the net worth requirement to nearly $2.5 million.

However, the IAC questions whether raising these thresholds would be an effective solution. The committee favors alternative approaches, such as enabling individuals to qualify based on their financial sophistication, including professional credentials, such as the series 7 securities license and the CFA designation, and investment experience. The committee also proposed developing a test to qualify as an accredited investor.

In the report, the IAC notes that finding a way to measure these aspects of financial sophistication would be much more challenging than the straightforward income and asset requirements currently in place. If the SEC decides to continue basing qualifications solely on financial thresholds, the IAC suggests limiting investments in private offerings to a percentage of assets or income.

Finally, the IAC “strongly encourages” that the SEC develop an approach to third-party verification of accredited investors in order to reduce the burden on issuers to verify accredited investor status themselves, a process which will surely become more difficult should a more complex definition be put in place.