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Redefining Accredited Investors – What This Means for You

Mihir Gandhi

Under current legislation, an natural person “accredited” investor is either:

  • An individual who has earned an income of at least $200,000 (or jointly with a spouse, has earned $300,000) in each of the previous two years, and who has a reasonable expectation of achieving the same in the current year, or

  • A person with a net worth, at the time of investment (alone, or with a spouse) of over $1 million, excluding the value of a primary residence.

This definition is about to come under review, in accordance with Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the Securities and Exchange Commission (SEC) to re-examine the definition every four years to determine whether it should be modified “for the protection of investors, in the public interest, and in light of the economy.”

The possibility that the income threshold and net worth thresholds might be increased (they haven’t been revised since the thresholds were initially put in place) has led to an outcry by many capital markets participants. Many of them feel that any revised definition should distinguish who is capable of “fending for themselves” vs just who has money. They have expressed that the legal definition should determine whether accredited investors have:

  • Access to proper information

  • The financial capability and the sophistication to access and undertake the risks and merits associated with offerings.

Areas of Discussion

Among other things, the SEC Chair Mary Jo White has stated that the SEC will be examining

  • Whether the existing net worth and income tests are appropriate measures to determine accreditation.

  • Whether more “sophisticated” individuals – such as legal counsel, CPAs and other experienced financial professionals – should be considered “accredited investors” regardless of whether or not they meet the income and net worth criteria.

  • Whether individuals with degrees in business, finance, accounting or economics should be considered based solely on their education.

  • Whether individuals who don't meet the wealth thresholds can still invest in private placements — provided they have a financial adviser.

Just under $800 billion in offerings were made exclusively to accredited investors in 2012. Increasing the net worth requirements of these investors would immediately remove about 60% of this investment from the pool. Whether this would then be supplemented by the numbers of individuals who qualify on criteria other than net worth, remains to be seen. The SEC will be looking at the overall effect on the capital markets and the economy if the accredited investor pool is expanded or contracted.

To see if you qualify as an accredited investor, or to verify one for your business, visit