Should Regulators Determine How Much an "Accredited Investor" Can Invest?
The U.S. Securities and Exchange Commission (SEC) established a SEC Advisory Committee on Small and Emerging Companies since they were asked to review the definition of an "accredited investor" as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The definition of an accredited investor has a significant impact on the ability to raise capital for many companies under Regulation D (i.e. private placements). If the definition of who qualifies as an accredited investor becomes more restrictive (i.e. raising the financial requirements), it could have a significant impact on companies looking to raise capital.
Currently, an individual qualifies as an accredited investor if they have an income of $200,000 a year or joint income of $300,000 a year for two consecutive years, or a net worth of $1,000,000, excluding your primary residence.
Interestingly enough, the SEC also has a mandate to help companies with the capital formation process. I guess the question is which goal is more important- protecting the wealthiest of our investors or not restricting the capital for a growing economy.
The SEC recommendations include:
1. Indexing all financial qualifications to inflation
2. Allowing the addition of spousal qualifications to obtain accredited investor status
3. Add new qualifications for individuals who are considered sophisticated which include the amount of their investments, professional credentials, or experience in exempt offerings
The SEC recommends keeping current income and net worth requirements in place but limiting the amount of investment an accredited investor can make to the size of their financial levels. Since when is it the purpose of regulations to set investment limits on investors, effectively telling them exactly how much they can invest? Imagine we now have a potential rule that will limit our most sophisticated and financially capable investors to a certain investment amount?
I completely understand rules that protect the people who can least afford the risk and do not have the experience or sophistication to understand the investment. However, since when is it our governments job to create artificial investment barriers to protect individuals who are fully capable of taking the risk and have the sophistication to understand the investment?
If a qualified accredited investor at any level wants to invest half or even all of their wealth in a particular exempt offering, why do they have to look to government regulation for permission to do so? In fact, I contend that a significant amount of wealth has been attained by accredited investors who have invested large portions of their net worth in companies that have become successful. One of the SEC Advisory Committee's recommendations is to allow individuals to take an accredited investor exam in order to qualify as an accredited investor. How would that impact the capital formation process? In essence, investors may have to take a test in order to qualify to invest their own money.
The SEC Advisory Committee stated that there is little to no evidence to suggest that the existing definition of an accredited investor has led to widespread fraud or other harm to investors. There is substantial evidence that the current definition works. Why do we need to adjust the definition?
Like other regulatory actions, and at a time where it is extremely important to keep capital formation growing, our regulators and Congress have decided to put additional restrictions on the number of people who are qualified to invest and, more outrageously, they could potentially tell investors how much they can invest.
It should be the job of regulators to protect investors from fraud or bad actors. However, increased restrictions on a definition that is working seems to be regulators trying to protect investors from themselves.
Damon D. Testaverde Managing Director Network 1 Financial Securities, Inc.
For more Information, or to receive our newsletter, please go to www.foraccreditedinvestors.com