SEC Investor Advisory Committee makes recommendations to the SEC regarding “accredited investor” definition and related considerations
- No specific changes to financial thresholds recommended
- New “financial sophistication” basis for accreditation proposed
- Investment amount limitations suggested
- Alternative means of verifying accreditation encouraged
- Additional standards for purchaser representatives and protections to non-accredited investors urged
Accredited Investor Recommendations
Last week the SEC Investor Advisory Committee met to discuss and consider whether the SEC should revise the definition of “accredited investor” and related matters. There has been much concern raised as to whether a revised definition could narrow the pool of accredited investors, and thereby have a chilling effect on investment in early stage companies and, as a result, on innovation and economic growth. The IAC’s recommendations do not include doing this; they do, however, propose analysis of whether the definition should be revised, so the issue is not yet dead.
The Committee’s five recommendations to the SEC were:
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 rule-making to revise the definition to better achieve its intended goal.
The Commission should revise the definition to enable individuals to qualify as accredited investors based on their financial sophistication.
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.
The Commission should take concrete steps [to] 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.
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.
These recommendations punt the underlying concern of whether the definition of “accredited investor” would be revised to increase the financial thresholds in the definition, including, as has been suggested, an adjustment for inflation, even though the financial thresholds have not been revised since the “accredited investor” definition was first adopted in 1982. The Committee acknowledged the need to balance protecting the investing public with the need to not overly curtail investment, with several specific references to angel investing, but it remains to be seen what changes, if any, are ultimately made, and whether those changes would, in fact, restrict the availability of money to companies.
The recommendations, along with the rationale behind the recommendations, can be found at the following link: http://www.sec.gov/spotlight/investor-advisory-committee-2012/accredited-investor-definition-recommendation.pdf