Changes in Accredited Investor Definition on Horizon

The Securities and Exchange Commission’s (“SEC”) Advisory Committee on Small and Emerging Companies met on May 18 and focused primarily on the proposed changes in the definition of an accredited investor.

During the meeting, the committee discussed the recent SEC staff report (“Report”) on the accredited investor definition and the various recommendations that were set out in the Report, including those regarding alternative ways to determine if an individual is financially sophisticated, in addition to utilizing the bright-line standards related to minimum financial thresholds that investors, issuers and their advisors can understand and apply easily.

It is clear that when the new definition is implemented, that the current financial standards of income or net worth will more than double and will be adjusted for inflation.  It should be noted that a number of the recommendations in the Report are intended to expand the accredited investor pool and if implemented, would be of benefit to issuers of unregistered private placements.  A few of those recommendations made that were discussed included permitting  spousal equivalents to pool their finances for the purpose of qualifying as accredited investors, permitting all entities with investments in excess of $5 million to qualify as accredited investors, grandfathering an issuer’s investors that meet and continue to meet the current accredited investor definition, and allowing individuals to qualify as an accredited investors based on other measures of sophistication, such as amount of their  investments, experience investing in exempt offerings and or passing an accredited investor examination.

With that said, it appears that there will be substantial changes in the definition of who qualifies as an accredited investor in the future.  Those changes will have a significant impact on both the size of the investor pool and on issuers  and broker-dealers as they will have to modify investor suitability questionnaires, subscription documentation and written supervisory procedures.