The Securities and Exchange Commission is expected to seek public comment in the coming weeks on whether to further amend the financial thresholds of the accredited investor definition, one of the principal tests for determining who is eligible to participate in U.S. private securities offerings.
While still in the “pre-rule stage,” the SEC’s regulatory agenda indicates that it plans to seek comment in April 2022 in an effort to further update the rules related to exempt offerings and “more effectively promote investor protection.”
The current accredited investor definition uses income and net worth thresholds to identify accredited investors.
According to the SEC, the $200,000 individual income and $1 million net worth threshold was established in 1982, and a $300,000 joint income threshold in 1988. The regulator further amended the net worth standard to exclude the value of an investor’s primary residence in 2011.
In December 2020, under former SEC chair Jay Clayton, the SEC expanded the definition to include investors and institutions who have the knowledge, expertise, and financial sophistication to participate in U.S. private markets.
The regulator, however, did not adjust the income and net worth thresholds, despite a sharp increase in investors who qualify as a result of inflation. According to the SEC, the number of U.S. households that qualify as accredited investors grew from approximately 2 percent of the population in 1983 to 13 percent in 2019.
In addition, exempt offerings now significantly out-raise their registered counterparts. The SEC estimated that exempt offering accounted for $2.7 trillion, or 69.2 percent, of all new capital raised in 2019 – with Regulation D 506(b) and 506 (c) offerings accounting for $1.56 trillion of the total. For comparison, registered offerings accounted for $1.2 trillion, or 30.8 percent, of new capital raised in 2019.
The accredited investor definition is a central component of Rule 506 under Regulation D. Qualifying as an accredited investor allows for the participation in investment opportunities that are generally unavailable to non-accredited investors, including investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds.
In a related event, the SEC’s Small Business Capital Formation Advisory Committee, which provides advice and recommendations to the SEC on rules, regulations and policy matters relating to small businesses, held a virtual meeting on February 10th to discuss the definition.