On May 1, 2024, the SEC Small Business Capital Formation Committee submitted its accredited investor definition recommendations to the SEC. Currently, an investor may qualify as an accredited investor by meeting certain professional criteria (i.e., FINRA Series 7, 65, or 82 licenses), or by meeting certain financial thresholds, including (1) a net worth of over $1 million (excluding a primary residence), or (2) an annual income of over $200,000 for individuals or $300,000 for spouses or partners.
The Committee presented three principal recommendations:
- First, the Committee recommended that the SEC maintain the existing financial thresholds without inflation adjustments.
- Second, the Committee recommended an alternative qualification method for investors that do not meet these financial thresholds. Investors would be allowed to qualify as accredited investors by completing an educational program. An investor that does so would be permitted to invest up to 5% of the greater of their income or net worth over a 12-month rolling period. The Committee also urged the SEC to consider this framework for Regulation Crowdfunding.
- Finally, the Committee recommended that the SEC look at ways to increase the transparency of the risks of investing in securities sold in exempt offerings. The Committee identified specific risks in its recommendation, including risks associated with total investment loss and limited liquidity, as well as the lack of a legal claim against a company (absent fraud) for losses. The Committee did not recommend specific ways to deliver this disclosure to investors.
Commissioner Uyeda, during the Committee’s February meeting to consider these recommendations, urged the Committee not to be tied to decisions made over 40 years ago and to consider that regulations would empower more individuals to invest in private markets without paternalistic constraints. In her remarks regarding the Committee’s third recommendation, Commissioner Peirce noted that “new Regulation D disclosures about ‘key investment risks,’ could be useful if it is a simple ‘BEWARE—NEW SMALL COMPANIES = BIG RISKS’ type disclosure.” However, Commissioner Peirce cautioned: “But we must be careful. Last year alone, issuers relied upon Regulation D to raise around $3 trillion– including from many angel investors. Beyond a basic buyer beware type requirement, mandated disclosures could undermine the freedom to craft disclosure in response to demands by investors, not regulators, that is so essential to the private markets.”
Read the Committee’s letter and Commissioner Peirce’s remarks.