SEC Split on Definition of ‘Accredited Investors’

The Securities and Exchange Commission (SEC) is currently working on changes to the definition of “accredited investor.” The SEC must periodically review that definition because of a requirement by The Dodd-Frank Act. Currently, it is defined as a pool of investors who may partake in certain unregistered securities sales, with its qualifying threshold for an individual being $200,000 in net income over two most recent years, or $1 million in net worth excluding a primary residence. For a married couple, the level is $300,000 in income to be considered accredited.

The challenge in defining the phrase is the need to “craft a definition that’s flexible enough to differentiate between investors,” according to Commissioner Kara Stein. Commissioner Michael Piwowar debated whether the agency should get rid of the concept of accredited and non-accredited investors altogether, calling it an “artificial distinction” into “arbitrary categories.” By prohibiting non-accredited investors from participating in unregistered securities offerings that carry a higher risk, the agency could also be limiting their return potential and stifling their ability to diversify investments. Various members of the advisory committee have recommended changes to the definition, including the addition of a sophistication test, and the Division of Corporation Finance has offered a preview of how a new definition might look if it incorporates such tests.