SEC Investor Advisory Committee Recommends Changes to Accredited Investor Definition | Practical Law

SEC Investor Advisory Committee Recommends Changes to Accredited Investor Definition | Practical Law

The SEC's Investor Advisory Committee recommended changes to the SEC on the definition of "accredited investor."

SEC Investor Advisory Committee Recommends Changes to Accredited Investor Definition

Practical Law Legal Update 8-584-3548 (Approx. 3 pages)

SEC Investor Advisory Committee Recommends Changes to Accredited Investor Definition

by Practical Law Corporate & Securities
Published on 14 Oct 2014 • USA (National/Federal)
The SEC's Investor Advisory Committee recommended changes to the SEC on the definition of "accredited investor."
On October 9, 2014, the SEC's Investor Advisory Committee (Committee) issued recommendations to the SEC on revising the definition of "accredited investor." The SEC is required under the Dodd-Frank Act to conduct a review of this definition. The Committee's recommendations encourage the SEC to consider, as it conducts its review, whether the current accredited investor definition achieves the goal of identifying a class of individuals who do not need Securities Act protections (such as a registration statement) to make an informed investment decision and to protect their own interests. In particular, the Committee recommends that:
  • If an analysis by the SEC reveals that a significant percentage of individuals who currently qualify as accredited investors are not in fact capable of protecting their own interests, the SEC should promptly initiate rulemaking to revise the definition to better achieve its intended goal. Currently, individuals may only qualify as accredited investors based on their net worth or annual income. The Committee noted its belief that income and net worth thresholds are not adequate representations of financial sophistication or the ability to bear losses.
  • The SEC should revise the accredited investor definition to enable individuals to qualify as accredited investors based on their financial sophistication and should develop alternative approaches to measure financial sophistication, such as professional and investment experience.
  • If the SEC chooses to continue relying exclusively or mainly on financial thresholds in determining accredited investor status, the SEC should consider alternative approaches to setting these thresholds, in particular by limiting investments in private offerings to a percentage of an individual's total assets or income.
  • The SEC should take concrete steps to encourage the development of an alternative means of verifying accredited investor status that shifts the burden away from issuers who may be poorly equipped to conduct the verification, especially if the definition of accredited investor becomes more complex in the future.
In addition, the Committee recommends that the SEC strengthen investor protections for non-accredited investors by imposing additional requirements on purchaser representatives, including:
  • Prohibiting them from having personal financial stakes in the proposed investment.
  • Imposing a fiduciary duty to act in the best interests of the purchasers being so represented.