In our last post, we looked at the recent recommendations by the Securities and Exchange Commission’s (“SEC”) Advisory Committee on Small and Emerging Companies (the “Committee”) to expand the definition accredited investor. For those who are familiar with the Committee’s activities, this was not the first time it recommended expanding the definition of accredited investor. In March 2015, for example, the Committee recommended that any modifications to the definition should have the effect of expanding, not contracting, the pool of accredited investors.
Partly in response to the recommendations made by the Committee and other similar bodies, and partly in recognition of the fact that the definition of accredited investor has not been comprehensively re-examined since its adoption in 1982, despite inflationary effects and increased informational availability, the SEC issued its own report on the topic in December 2015. In the report, the SEC stated that an overly narrow definition that limited the number of accredited investors could risk restricting businesses’ access to a crucial source of capital and be inconsistent with the SEC’s capital formation mandate, while an overly broad definition could potentially be inconsistent with its investor protection mandate. The SEC recognized, however, that there is a need for altering the current definition by looking to objective measures of sophistication.
The report recommended that the agency consider one or more of the following methods of revising the accredited investor definition: (i) revising the financial thresholds requirements for natural persons and the list-based approach for entities to qualify as accredited investors by, for example, taking inflation into account on a going-forward basis, (ii) permitting spousal equivalents (defined as “a cohabitant occupying a relationship generally equivalent to that of a spouse”) to pool their finances, (iii) creating new, additional inflation-adjusted thresholds that are not subject to investment limitations (e.g., $500,000 for individual income, $750,000 for joint income, and $2.5 million for net worth); and (iv) allowing individuals to qualify as accredited investors based on non-financial measures of sophistication, such as those with a minimum amount of investments, certain professional credentials (e.g., CFAs), or experience investing in exempt offerings (e.g., investment in at least 10 private securities offerings), and those who pass an accredited investor examination, among other things.
The SEC estimates that revising the accredited investor definition in accordance with the above recommendations would significantly alter the size and composition of the pool of accredited investors that are natural persons. Adopting the new income threshold of $500,000 and net worth threshold of $2.5 million, for example, would reduce the number of qualifying households to approximately 28% of the currently qualifying households, while adopting the various non-financial measures of sophistication would likely expand the pool of accredited investors significantly.
This post is part of a multi-post series on efforts to expand the definition of accredited investor. In our next post, we will look at recent legislative efforts in this area.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
 See generally SEC Advisory Comm. on Small and Emerging Cos., Recommendations Regarding the Accredited Investor Definition (July 20, 2016), https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf. Unless otherwise specified, all references to the committee recommendations are to this citation.
 SEC Advisory Comm. on Small and Emerging Cos., Recommendations Regarding the Accredited Investor Definition (Mar. 9, 2015), https://www.sec.gov/info/smallbus/acsec/acsec-accredited-investor-definition-recommendation-030415.pdf.
 See generally SEC, Report on the Review of the Definition of “Accredited Investor” (Dec. 18, 2015), https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. Unless otherwise specified, all references to the SEC report are to this citation.