SEC Issues Staff Report on Accredited Investor Definition

The U.S. Securities and Exchange Commission (SEC) has issued a press release to inform that it recently conducted a review of the „Accredited Investor“ definition as mandated by the Dodd-Frank Act. The review is typically conducted every four years and aims to ensure appropriate investor protection in the private securities marketplace (Regulation D securities market) where securities are exempt from registration and thus exempt from detailed disclosure requirements. The findings from this review are summarized in the enclosed report along with a discussion of the importance of exempt offerings and the evolution of the accredited investor definition.
In its report, the SEC notes that accredited investors are typically comprised of persons that possess significant financial resources and demonstrate a higher level of financial literacy compared to non-accredited investors. However, the SEC also acknowledges concerns about the current definition’s effectiveness in protecting investors and ensuring their understanding of complex private securities which is why the Commission presents some targeted revisions to the accredited investor definition. These revisions aim to account for these concerns, while additionally allowing those persons to qualify as accredited investors that possess the necessary know-how from their professions and have so far been excluded.
##### In detail, the following revisions are proposed:
(1) Incorporating measures of professional knowledge: The SEC proposes to allow individuals who hold certain professional certifications or designations, such as a CFA (certified financial analyst), CPA (certified public accountant), or certain law licenses, to qualify as accredited investors. This change would acknowledge the specialized financial knowledge these professionals possess.
(2) Considering investor education: The Commission is contemplating on allowing individuals who complete accredited investor education programs offered by recognized institutions to be classified as accredited investors. This revision would provide an alternative pathway to obtaining accredited investor status based on demonstrated financial literacy rather than just income or net worth.
(3) Evaluating investor experience: The SEC is suggesting to take into account an investor’s experience in managing their own investments or participating in private offerings. By assessing an individual’s track record and experience in navigating complex financial decisions, this change would help ensure that only those with adequate expertise and understanding are considered accredited investors.
(4) Adjusting income and net worth thresholds: The SEC is also considering a modification to the existing income and net worth thresholds for accredited investor status. This adjustment could involve inflation-adjusted increases, which would maintain the real value of these thresholds over time. Additionally, the SEC suggests exploring alternative metrics, such as an individual’s overall financial situation or access to professional financial advice, to determine accredited investor eligibility.
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In its conclusion, the SEC emphasizes the importance of investor protection in the private securities marketplace, while acknowledging the evolving nature of financial markets and the need for periodic review of regulations like the accredited investor definition. By exploring potential modifications and their consequences, the Commission aims to strike an optimal balance between investor protection and market efficiency, ensuring that the private securities market remains accessible to those who can truly afford the risks associated with such investments.
The SEC would welcome feedback on any of the proposed measures or any other issue of interest discussed in the report. A submission deadline is not provided.