SEC Delivers Recommendations on Accredited Investor Standard

The SEC recently delivered recommendations originally adopted by its Small Business Capital Formation Advisory Committee on February 10, 2022. During this meeting of SEC minds, the committee discussed the current definition of what makes someone an “accredited investor.” The subject itself is challenging- creating a workable definition that takes into account the complex factors at play is no easy task. Regulators need to balance the need to protect investors while still doing their best to facilitate capital formation and encourage the creation of investment opportunities. 

After convening, the committee presented several recommendations to the Commission which should be examined when creating new rules on accredited investor financial thresholds. These include:

  1. Current financial thresholds for individual investors to qualify as accredited investors should not be increased.
  2. In the future, regulators may want to consider indexing financial thresholds for inflation periodically.
  3. Due to the fact that financial thresholds are an imperfect vehicle for measuring investor sophistication, the committee recommends that regulators provide alternative means of investors being able to qualify as sophisticated. Some of these metrics may include experience in the investment markets, relevant professional and work experience, membership in professional organizations and associations, educational credentials, professional certifications, as well as potential tests to help determine if someone is sophisticated or not. 

In their statement, the committee recognized that this is an incredibly complex process and that regulators would do well to try and identify and mitigate any unintended consequences from potential rule changes. They also stress that it is important for the commission to recognize the difference between business failures and frauds. In their view, fraud occurs by bad actors regardless of regulatory thresholds. Additionally, they advocate a multi-pronged attack against fraud in markets, including investor education regarding portfolio diversification to help mitigate the risk from a single investment failure.

You can read the statement in its entirety here. You’ll also find some relevant linked docs below:

-The published remarks of Chair Gary Gensler and Commissioner Hester M. Peirce

-An overview of the SEC Small Business Advocacy Office’s FY2021 Annual Report

-A accredited Investor in Context Presentation

-A transcript of the meeting as well as its agenda.

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