On October 9, the Investor Advisory Committee (Committee) established by the Securities and Exchange Commission released its recommendations for changes to the definition of “accredited investor” included in Rule 501 promulgated under the Securities Act of 1933 (Securities Act). Specifically, these recommendations relate to the determination of “accredited investor” status with respect to natural persons. The Committee’s recommendations are part of the SEC’s review of such definition that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

In its report, the Committee recommended that the SEC: 

• Evaluate whether the accredited investor definition is effective in identifying individuals who do not need the protections provided under the Securities Act, questioning specifically whether the current financial thresholds based on income and net worth appropriately identify individuals with the wealth and sophistication to bear the potential risks of private offerings;

• Initiate new rulemaking with respect to the definition of accredited investor if, as the Committee expects, the SEC’s analysis indicates that a significant portion of individuals who currently qualify as accredited investors are not in fact capable of protecting their own interests in private offerings;

• Revise the definition of accredited investor to enable individuals to qualify as such based on their financial sophistication, noting that extensive investment experience and certain credentials, such as being a Chartered Financial Analyst, should be taken into account;

• Create alternative approaches to setting financial thresholds, such as limiting investments in private offerings to a certain percentage of an individual’s assets or income that may better protect investors from the risks of private investments;

• Encourage the development of a means of identifying accredited investors that is an alternative to the current regime that places the burden of identification on issuers, including by having an independent third party perform that verification function; and

• Strengthen the protections that apply to non-accredited investors that participate in private placements in reliance on advice from a purchaser representative, including requiring that any such purchaser representative be free of any financial conflicts of interest (e.g., receiving payments from the issuer).  

The SEC’s review of the determination of accredited investor status with respect to natural persons was mandated by the Dodd-Frank Act. SEC Chairman Mary Jo White recently told reporters that the SEC’s review of the definition is ongoing. 

Read more.