The Securities and Exchange Commission issued a concept release on Tuesday, seeking public comment on possible changes aimed at expanding access to private securities. It includes a number of questions around growing the pool of accredited investors, such as whether to allow clients of registered financial professionals to be accredited and whether to include education and job experience as a qualification.
The current definition of an accredited investor—based on an individual’s net worth—hasn’t been modified in any meaningful way since it was enacted via the SEC’s regulations governing the sale of unregistered investments in 1982.
Earlier this year, the Senate Committee on Banking, Housing and Urban Affairs announced it was considering a bipartisan package of bills, colloquially called the JOBS Act 3.0, meant to spur capital formation, prompt more initial public offerings and generally expand the public's opportunities to invest. That package passed the House of Representatives last July. One bill in that package, the Fair Investment Opportunities for Professional Experts Act, would expand the definition of an accredited investor to include education and job experience. It also directs the SEC to update its definition in Regulation D.
According to the concept release, the SEC may revise the financial thresholds required to qualify as an accredited investor and the list-based approach for entities to qualify. One option could be inflation-adjusted income and net worth thresholds with no investment limits, while another could be indexing financial thresholds for inflation on an ongoing basis. The agency may allow spousal equivalents to pool their investments in order to qualify.
For entities, it may replace the $5 million assets test with a $5 million investments test and include all entities, “rather than specifically enumerated types of entities.” It may also expand the types of entities that may qualify.
The agency is also considering grandfathering in issuers’ existing investors under the current definition.
It may also expand the criteria for individuals beyond income and net worth, considering such things as minimum amount of investments, certain professional credentials, experience investing in exempt offerings and an accredited investor examination. The SEC may even allow individuals to opt in to being accredited investors, having received a risk disclosure. It’s also considering allowing knowledgeable employees of private funds to qualify for investment in their employer’s funds.
Another idea under consideration would be to qualify clients of registered financial professionals as accredited investors. And if the agency were to allow that, those financial professionals may be subject to educational or other qualifications and additional disclosures. Related to this, the SEC is exploring whether the financial professional would be required to assess the appropriateness of the investment on a transaction-by-transaction basis or by looking at the client’s portfolio as a whole.
Currently, about 16 million American households qualify as accredited investors under the existing criteria, the SEC found.
Comments are due to the SEC within 90 days of the concept release being published in the Federal Register.