Accredited Investor Definition
The SEC’s Investor Advisory Committee is meeting on October 9th to discuss whether and how the definition of “accredited investor” perhaps ought to be changed. At the top of the agenda is this:
“Discussion of a Recommendation of the Investor as Purchaser Subcommittee on the Definition of Accredited Investor”
I have pulled the recommendations out of the full report for you, so that you can quickly peruse them.
The Committee’s Recommendations
1. The Commission should carefully evaluate whether the accredited investor definition, as it pertains to natural persons, is effective in identifying a class of individuals who do not need the protections afforded by the ’33 Act. If, as the Committee expects, a closer analysis reveals that a significant percentage of individuals who currently qualify as accredited investors are not in fact capable of protecting their own interests, the Commission should promptly initiate rulemaking to revise the definition to better achieve its intended goal.
2. The Commission should revise the definition to enable individuals to qualify as accredited investors based on their financial sophistication.
3. If the Commission chooses to continue with an approach that relies exclusively or mainly on financial thresholds, the Commission should consider alternative approaches to setting such thresholds – in particular limiting investments in private offerings to a percentage of assets or income – which could better protect investors without unnecessarily shrinking the pool of accredited investors.
4. The Commission should take concrete steps encourage development of an alternative means of verifying accredited investor status that shifts the burden away from issuers who may, in some cases, be poorly equipped to conduct that verification, particularly if the accredited investor definition is made more complex.
5. In addition to any changes to the accredited investor standard, the Commission should strengthen the protections that apply when non-accredited individuals, who do not otherwise meet the sophistication test for such investors, qualify to invest solely by virtue of relying on advice from a purchaser representative. Specifically, the Committee recommends that in such circumstances the Commission prohibit individuals who are acting as purchaser representatives in a professional capacity from having any personal financial stake in the investment being recommended, prohibit such purchaser representatives from accepting direct or indirect compensation or payment from the issuer, and require purchaser representatives who are compensated by the purchaser to accept a fiduciary duty to act in the best interests of the purchaser.
Will There Be Fireworks?
Last time the Committee met there were some fireworks. I gleaned a bunch of great quotes from that hearing that you can find at this blog post.
A couple of my favorites:
[T]his is an area where there’s a surprising lack of even basic descriptive statistics. What, for example, is the, you know, distribution of the size of investments that are made by individuals into Reg. D private placements? What percentage of these investments come in from accredited investors? What percentage come in from unaccredited investors under 506 who are relying on purchaser representatives? What do we know in general about the risk and return profile of private placement investments? What percentage of them even return the initial investments? What’s the variance? How does that compare to the risk and return that you would get in a, you know, index fund or what have you? These are basic descriptive statistics about the market as a whole that to the best of my knowledge really are lacking. And it seems that if we want to do the best possible job for all participants in the process, for the companies that are offering securities pursuant to Reg. D, for the investors that are buying, and for the intermediaries in the market, it would behoove all of us to get some of this basic data.
I also liked this one:
I would like to be the one person on this committee who sticks up for the notion, the antique notion, of people making their own decisions as autonomous actors in their own lives; we should keep that in mind. We allow people to buy their own houses; that is the biggest asset that anybody owns. There is no test other than what a bank might apply, those are usually pretty good tests. People raise their own children; we don’t have the state do that or make a decision about whether somebody is qualified to do that, sophisticated enough, has enough money. I’m not saying we shouldn’t look at this question of accredited investors; but we should look at the fact that people want to make to provide their own retirements and they should be given the freedom to do that.
This one was also good:
There are people and there will always be people that believe that the markets will fix those issues by themselves and anyone should be able to transact with anyone on any terms that two people agree to. If that is the position that we want to take here then not only should this committee disband but the building should be sold for another purpose.
I hope the Committee doesn’t recommend anything dire that would hurt the early stage company ecosystem. I like the idea of allowing proportionality in investments, which is what recommendation 3 above is getting at. I also think recommendation 2 above is a good idea. I disagree with changing the current financial thresholds. It will be interesting to watch the Committee meet.