Responses to Proposed Accredited Investor Criteria Changes

In December of 2018, the Securities and Exchange Commission (SEC) proposed new rules that would expand the accredited investor definition and increase the number of people who would qualify. State securities regulators, the attorneys general of eleven states, and a number of consumer advocates have opposed these amendments, citing a lack of protection for individual or retail investors. Here at VerifyInvestor.com, we’d like to offer our take on the detractors’ concerns.

Accredited Investors Have More Choices

First, let’s talk about the fact that issuers of securities that utilize accredited investors have many more options in the private placement market compared with non-accredited investor-related offerings. Many of these options are exempt from SEC registration requirements. For instance, securities offered under the exemption in Rule 506(c) of Regulation D may be publicly advertised, but they are only open to accredited investors.

Private Placement Investor Safeguards: Is “Sophistication” the Answer?

Advocates are concerned that if the amendments go through, then crucial safeguards for retail investors will slip in the private placement market. For example, as cited in Financial Advisor IQ, a resource of the Financial Times, Healthy Markets Association’s executive director, Tyler Gellasch, remarked on the amendments’ lack of “even the most basic disclosures or rights” for retail investors, adding that without these protections, even so-called sophisticated investors are only “making a guess.” Along the same lines, SEC Commissioner Robert Jackson, Jr. responded to the amendments with a concern about unscrupulous brokers: “Contrary to the [proposed amendments] release’s intuition that brokers will protect ordinary families investing in private markets, the evidence shows that those families will be dealing with the brokers most likely to have wronged clients in the past."

While considering Commissioner Jackson’s comments, let’s discuss the newly proposed sophisticated investor category. This category would grant accredited investor status to people with certain professional licenses. These include the Series 7, Series 82, and Series 65 licenses. The category would additionally include “knowledgeable employees” of private funds. However, the amendment would not generally allow these professionals to use their status as an individual accredited investor to also benefit the people they serve. Instead, the clients would have to fit into one of the accredited investor categories themselves, or they would have to be part of a qualifying entity. For instance, one clause in the amendment would include entities, such as Native American tribes owning over $5 million USD in investments, as defined by Rule 2a51-1(b) of the Investment Company Act.

Regarding sophisticated investors, the North American Securities Administrators Association (NASAA) proposed adding a relevant experience requirement of five years or more for those financial professionals qualifying for the new accredited investor category. Along with the same individual income and net worth requirements as other accredited investors, according to ThinkAdvisor. The rationale behind this recommendation was so that individual investors, even financial professionals, would also be financially able to bear the serious risks of the private placement market.

NASAA is also seeking more data on private offerings, according to ThinkAdvisor. This includes evidence of retail investor interest in private offerings, as well as evidence that legitimate private companies want to solicit retail investors for their securities. Additionally, NASAA wants the threshold for entities to increase from $5 million USD to $10 million USD.

Increasing Income and Net Worth Thresholds for Accredited Investors

Another concern is that because the income and net worth thresholds have not been adjusted since 1982, the number of households qualifying as accredited investors have increased over time, from about 1.6% in 1982 to 13% today, according to analysis from the SEC. "It’s implausible that 16 million American households currently have both the financial sophistication and the capacity to bear the kinds of investment losses that courts and prior Commissions have considered essential prerequisites for participation in private offerings,” wrote Christopher Gerold, president of NASAA and head of the New Jersey Bureau of Securities, in a 15-page letter to the SEC. The eleven attorneys general concur, calling for the current income and net worth thresholds to be raised and then adjusted for inflation every four years or earlier, as cited in another Financial Advisor IQ article. Concurring attorneys general include California, Connecticut, Delaware, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New Mexico, New York, and Oregon.

Why Choose Private Placement?

At VerifyInvestor.com, we serve investors from diverse backgrounds, many of whom are retail investors with an interest in the private placement market. They often want to diversify their portfolios and avoid relying on public markets alone. Diversified portfolios are especially important now, considering the economic forces brought about by COVID-19. Additionally, by investing in a smaller company unable to engage in public market offerings, individuals contribute to that company’s community, often on a local level.

What do you think? Should financial advisors qualify as accredited investors on their credentials alone, or do you believe they need a certain level of wealth and experience to bear the risk? Should other finance industry experts be able to become accredited investors on merit alone? Let us know in the comments.