The SEC Investor Advisory Committee (IAC) is recommending that the agency to make substantial revision to who should be considered a sophisticated investor. This could change who can get involved in private placements as investors.
Currently, there are about 8.5 million accredited investors. The Dodd-Frank Act obligates the SEC to reexamine the accredited-investor definition every four years.
At the moment, accredited investor standard only allows individuals who make a minimum of $200K or have a net worth of $1M—the value of their primary residence not included—to invest in private placement purchases. If a couple’s net worth is $300K together, they may qualify too.
Now, the SEC panel is saying that such criteria for private placement investments merely oversimplifies the process of determining whether an individual has enough money and liquidity to handle the possible risks involved in private offerings. The IAC said that the existing thresholds fail to provide enough protection for investors, whose net worth may have been determined by illiquid holdings or retirement funds. Many retirees regularly depend on their investments to cover their living expenses every month, so those monies can fluctuate.
The committee wants the Commission to get rid of these thresholds. Instead, it wants a sophisticated investor to have had substantial education, professional credentials, and experience in investing. A financial-sophistication test is another method the IAC is suggesting. The committee also doesn’t think that retirement accounts should be included when factoring whether an investor meets the $1 million wealth threshold, were that to remain in place.
The IAC said that if the regulator decides to keep the standards for net worth and income, then the SEC should only allow investors of private placements to put in a certain percentage of their assets or funds. The committee wants third parties, rather than securities issuers, to verify accredited investor status. It also wants the non-accredited investors in private offerings that were recommended by a purchaser representative to get more robust protections.
Aside from the net worth and income thresholds that are criteria for individual accredited investors, federal securities laws also defines accredited investors as:
· A bank, insurer, business development firm, registered investment company or small business investment company
· An employee benefit plan if its assets are over $5 million or its investment decisions are handled by a bank, registered investment adviser, or insurer.
· An executive officer, director, or general partner of the company that is selling the securities.
· A charitable organization, partnership, or corporation with assets above $5 million.
· A business in which all equity owners are accredited investors.
· A trust that was not set up to acquire the securities offered and has assets above $5 million.
The SSEK Partners Group is a securities fraud law firm that helps high net worth individuals and institutional investors to recoup their losses.
Accredited-investor definition revamp backed by SEC panel, Investment News, October 9, 2014
SEC Panel Urges Update of ‘Accredited Investor’ Standard, CFO, October 13, 2014
The Dodd-Frank Act (PDF)
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