SEC Staff Report Says Accredited Investor Population Has Grown 16x Since 1982

The regulator’s new staff report notes that the rise in accredited investors may be due to inflation and DC plan assets.

The Securities and Exchange Commission released its latest staff on the accredited investor definition recently.

Per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC must review the accredited investor definition at least once every four years evaluating its criteria. Previous reviews took place in 2015 and 2019.

In this most recent report, the SEC highlighted that the number of accredited investors has grown substantially since the exemption for public registration was created under Regulation D in 1982. Per the report, 1.51 million – or 1.81% – of American households then qualified as accredited investors. In 2022, 24.3 million – or 18.5% – of American households qualified, an increase of more than 16 times. The report explained that this “appears to be largely due to the fact that the natural person accredited investor thresholds have not been adjusted to reflect inflation.”

According to the report, if the thresholds were adjusted to account for inflation since their initial adoption through 2022 using CPI-U, “the net worth threshold would increase from $1 million to $3,037,840, the individual income threshold would increase from $200,000 to $607,568, and the joint income threshold would increase from $300,000 to $911,352.”

An accredited investor is someone who may make private offering investments on their own behalf and may be defined, per the SEC, in multiple ways, including:

• An individual who has a net worth exceeding $1,000,000.
• An individual who has an income in excess of $200,000 in consecutive years or $300,000 joint income with their spouse.
• An individual who is a partner of the entity making the private offering.
• An individual who holds certain financial credentials, such as a FINRA registration as a broker-dealer.

Similarly, the report noted that a significant number of individuals who meet the qualification criteria do so primarily on account of their holdings in a defined contribution plan. As outlined in the report, 16.44 million households qualify based on income or wealth considerations; however, this figure falls to 11.6 million when assets from defined contribution plans are factored out.

As explained in the report, as of 2022, an estimated 34% of dedicated retirement assets are held in IRAs, compared to 2.5% of retirement savings in 1980. This appears to be because, when individuals leave their jobs, they often desire greater control over their investment decisions and roll their funds into an IRA. This control, however, may come with greater risk as the individual “may lack experience in building a portfolio that appropriately allocates risk and ongoing management of investments.” Additionally, these investors likely cannot easily endure losses in private markets, since their retirement assets are at stake.

The report did not make any recommendations regarding changes to the accredited investor definition, but it did note that the North American Securities Administrators Association has recommended both excluding retirement assets for the purposes of accreditation and adjusting the income and net worth thresholds to account for inflation. The report also acknowledged that the SEC’s Investor Advisory Committee has recommended alternative definitions based on financial sophistication, among other criteria.

The report also stated that it welcomes public feedback.

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