Why the SEC is Reviewing its Definition of ‘Accredited Investor’

by | Jun 10, 2015 | Financial Services

There’s money to be made, and lost, through both the operational and investment activities of small business, whether privately held or publicly traded. “Accredited Investors” are the key to hundreds of billions of dollars of financing that fuel American businesses each year. The Securities and Exchange Commission (SEC) is currently reviewing whether or not the definition of who constitutes an “accredited investor” should be amended. In fact, the Dodd-Frank Wall Street Reform and Consumer Protection Act mandates the SEC to conduct a review of whether the definition should be changed every four years.

Why Investors Need Accreditation
Just a quick refresher on what ‘accredited investor’ status is supposed to accomplish. Typically, securities offerings must be registered, but many laws provide waivers from onerous securities compliance when offerings are only made to accredited investors, the idea being that such investors need fewer protections than the general population. Setting income and net worth benchmarks are supposed to help mitigate the potential impact on unsophisticated investors who may make poor investment decisions, and/or help prevent them from being taken advantage of due to a lack of investment knowledge.

Current Definition
There are many ways an investor can qualify as an accredited investor, but most people focus on the two key categories that individuals may qualify. Currently, that is an individual with an annual income of $200,000 or more per year ($300,000 with their spouse) in each of the last two years who has a reasonable expectation of achieving the same income in the current year, or a person (individually or with a spouse) having at least $1 million in net worth.

Here are a couple of examples of investors that would generally be deemed accredited investors, as provided in a public statement by SEC Commissioner Luis Aguilar:
* A single parent with three children and a mortgage whose annual salary is $205,000
* Someone recently windowed, without a separate source of income, but an inheritance of $1 million
* A retired senior citizen who has managed to save more than $1 million in his/her retirement accounts, but needs that money to fund retirement.

Assessment of Financial Sophistication
In each of the scenarios above, the person likely meets the criteria of an “accredited investor”. But what the current definition fails to capture is the degree of financial sophistication that the investor possesses. Alternatively, someone who does not meet the salary or asset threshold of the current definition of accredited investor may indeed be less vulnerable due to, for example, their designation as a chartered financial accountant, or a professor of corporate finance. An increasing number of people are asking the SEC to acknowledge accredited investors that are financially sophisticated or experienced, and the SEC is carefully considering whether it should amend the definition of “accredited investor” accordingly.

VerifyInvestor.com conducts 3rd party verifications to ensure that investors are accredited investors. To learn more about when this is required by federal law, please visit VerifyInvestor.com.

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