Accredited Investor Definition: Investor Advisory Committee Takes It On


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”

If you want to submit comments to the Committee, you can submit them here. If you would like to see the comments that have been submitted so far, you can find those here.

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.

The Next Big Thing In Real Estate Is The Consumer


By Bryan Copely, CEO & Founder of

Fifteen years ago, buying a home was an exercise in driving: to the agent’s office, the neighborhoods you wanted to live in, the open houses.

About a decade ago, real estate technology began to reduce the driving. With the emergence of online brokerage and portal sites, home shoppers could view homes for sale online instead of having to physically browse paper listings or drive around neighborhoods. This greatly increased the efficiency of home searches and empowered consumers by giving them more access to the market.

Real estate wasn’t the only industry undergoing change. In fact, it seemed as if all at once all of our conventions were being transformed by the internet: Facebook was changing the way people connected and interacted socially, Google was funneling all the world’s information to their fingertips, eBay was empowering individuals to conduct worldwide ecommerce … you get the idea. Understandably, about this time people started to talk about how technology would completely reinvent real estate.

Until it didn’t. A decade later, the vanguard of innovation in the real estate industry consists of an algorithm that can guess your home’s value within a 35% margin of error.

The problem for the consumer is that algorithms don’t buy homes, people do. And you can’t find out who those people are without putting your home up for sale on the market.

Until today. Today, Rebls is reinventing real estate. We’re empowering homeowners to see who’s shopping for their home without having to depend on computer algorithms, list their home for sale, or even challenge buyers to pay a premium to make them move. They can create a free Rebls Profile without any commitments and see which buyers are looking for a home that matches theirs. Homeowners and buyers get to decide when to initiate contact with a professional instead of being pressured to buy or sell their home before they’re ready. Score one for the consumer.

Rebls is also taking on the elephant in the room—the 6% commission homeowners often pay real estate agents when they sell their homes. In 2012 alone, King County residents paid $582 million in total real estate commissions.

Because Rebls allows homeowners to find their own buyers (and buyers to find their own homes) agents no longer have to play matchmaker. Instead, agents can focus on closing deals and therefore afford to charge less than 6% in exchange for their reduced workload. Consumers have already demonstrated their need for the service Rebls provides—in 2013, the National Association of Realtors reported that 52% of buyers found their own home online.

Lastly, the consumer is demanding more options. Buyers simply don’t have enough homes to choose from, as The Seattle Times recently explored on their front-page. Rebls helps alleviate this problem by giving homeowners an easy entry into the market, allowing buyers more homes to choose from. And Rebls never syndicates a listing from another site, so you don’t have to worry that you’ll find the same homes on our site that you’ve found everywhere else.

The consumer is demanding more options, access and control in real estate, and as sure as technology advances they will get all of them. Technology is enabling consumer empowerment to move forward like a wall of water. Rebls is ready to ride the wave. Are you bringing your surfboard?

SEC May Re-Define “Accredited Investor”

We live in a world where the SEC can re-define the term “accredited investor” and substantially harm the startup ecosystem.

I know, this sounds like an excessively dramatic statement. But in this case it is a true statement. The SEC can re-define “accredited investor” to exclude many, many people who now qualify as “accredited investors.”

And in fact, in the Dodd-Frank Act the Congress asked the SEC to occasionally re-consider the definition of accredited investor. See Section 413 of the Dodd-Frank Act.

If you are interested in this issue, you may want to tune in to the next meeting of the SEC’s Investment Advisory Committee. Many members of the Investment Advisory Committee are advocating substantially increasing the financial thresholds to qualify as an accredited investor.

Upcoming SEC Investment Advisory Committee Meeting

investment advisory

The definition of “accredited investors” is critical to the startup company ecosystem because most companies don’t receive venture funding. Most companies are angel backed. And to qualify as an angel, you generally have to be an “accredited investor.”

There is a great recent New York Times article on this issue: Regulatory Changes Could Restrict Pool of Private Investors.

If you are interested in advocating for the right result here, please visit the Angel Capital Association’s website. The ACA web site makes it very easy to submit comments to the SEC. The ACA web site includes template comment letters to the SEC.

If you want, instead of going to the ACA web site to be directed to the SEC site to make a comment, you can simply click on this link:




Your message can be simple. “Dear SEC: Please do not make it harder to qualify as an accredited investor. Startups needs angels. Startups create the most jobs in America. America needs jobs and innovation.”

Please contribute to the effort.


Intrastate Crowdfunding

One of the drawbacks of Washington’s intrastate crowdfunding law is that it is built on Section 3(a)(11) of the federal Securities Act.

Section 3(a)(11) allows an “intrastate” offering to escape the application of the federal Securities Act. So, if you comply with 3(a)(11), you won’t have to comply with the federal equity crowdfunding law when it goes into effect.

The trouble is, what constitutes an intrastate offering?

Section 3(a)(11) reads as follows:

“Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.”

Rule 147 is the SEC’s interpretation of Section 3(a)(11). It says an issuer shall be deemed to be doing business within a state or territory if:

(i) The issuer derived at least 80 percent of its gross revenues from the operation of a business or of real property located in or from the rendering of services within such state or territory; provided, however, that this provision does not apply to any issuer which has not had gross revenues in excess of $5,000 from the sale of products or services or other conduct of its business for its most recent twelve-month fiscal period;

(ii) The issuer had at least 80 percent of its assets located within such state or territory;

(iii) The issuer intends to use and uses at least 80 percent of the net proceeds to the issuer from sales made pursuant to this rule in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within such state or territory; and

(iv) The principal office of the issuer is located within such state or territory.

These parameters might not be difficult for the brand new startup to satisfy, or perhaps even for the pre-revenue startup to satisfy. But for more mature businesses, the 80% tests might be difficult to meet.

A recommendation on how to improve Washington’s law

Washington might want to expand the utility of its crowdfunding law by expanding it to also take the approach Maine took. Maine didn’t rely on Section 3(a)(11), but instead relied on Rule 504. Under Rule 504, if a company files a registration statement, it will have a federal and state law exemption. And that federal exemption will be Rule 504, not Section 3(a)(11).

I’ve embedded the Maine statute below for reference.

  Maine Crowdfunding Law