SEC to consider change to definition of Accredited Investor

By MacDonald Weiss PLLC, At its next meeting of the Investor Advisory Committee of the SEC, to be held on October 9, 2014, the Commission’s agenda includes a discussion of recommendations regarding amendments to the definition of “accredited investor.”

The low-hanging fruit would be to simply increase the income and net worth tests for individuals, currently set at individual net worth, or joint net worth with that person’s spouse, that exceeds $1 million, excluding the value of the person’s primary residence; or annual individual income in excess of $200,000 ($300,000 with a spouse), in each of the two most recent years, with a reasonable expectation of reaching the same income level in the current year. However, it’s not such low hanging fruit when the economic consequences to seed and emerging company finance are considered because it will cause many people to fall outside the definition of “accredited investor”, with consequences in the market for early stage capital. In its report to the SEC in 2013, the GOA estimated that increasing the income and/or net worth thresholds using an inflation-based criteria would eliminate 56% of current angels (source: GAO report to SEC, July 2013). That consequence is important because angels are the primary funding source for seed and emerging companies. In the last few years, angels have invested nearly equal aggregate amounts of funds as venture capital firms have invested annually (over $22 billion for angels as compared to over $26 billion for VC firms) but angel investment are spread out among over 46,000 deals per year, whereas VC firms invested larger sums in substantially few deals, only about 2,200 per year. The projected 56% reduction in qualified angels due to a simple inflation adjustment could, for example, result in a decrease of over $12 billion of available capital, risking the ability of thousands of businesses to find funding.

The SEC will likely also be considering amending the definition to include a sophistication test as an alternative to the income and net worth tests, such as qualifying individuals with finance, economic or accounting credentials, as accredited.

It’s possible that the ultimate outcome may be a combination of the above proposals.

The public is invited to submit comments or statements.

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