SEC Releases Staff Report on Definition of Accredited Investor

Who may be interested: Investment Advisers; Closed-End Funds; BDCs

Quick Take: The SEC recently released a staff report reviewing the accredited investor definition. Section 413 of Dodd-Frank requires that the SEC undertake a review of the accredited investor definition once every four years to determine whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy. The review focuses on changes in the composition of the accredited investor pool since the adoption of the accredited investor definition. While the report made no recommendations for changes to the accredited investor definition, it did ask for public comment on the report. This is notable, considering that the SEC’s updated regulatory agenda showed the SEC is considering proposing updates to Regulation D, including the accredited investor definition.

An accredited investor is a term defined under Rule 501(a) of Regulation D. Persons who qualify as accredited investors are able to invest in certain private securities offerings. To be an accredited investor, an individual must (i) have a net worth exceeding $1 million, (ii) have an annual income over $200,000 for each of the two most recent years, (iii) be a partner of the entity making the private offering, or (iv) satisfy one of the other relevant criteria in Rule 501(a).

The staff report estimates that in 1983, one year after the exemption for public registration was created, less than 2% of U.S. households met one of the three net worth or income thresholds to qualify as accredited investors under Regulation D; in 1989, this percentage had risen to 3%; and, by the end of 2022, 18.5% of U.S. households qualified for Regulation D accreditation. The staff report attributed this increase to the fact that accredited investor thresholds have not been adjusted to reflect inflation. The staff report further estimated that if accredited investor thresholds are not adjusted for inflation going forward, approximately 30% of households will qualify as accredited investors by 2032.

While the staff report made no recommendations, it did highlight a number of previous recommendations concerning the accredited investor definition, including:

• A 2015 and 2019 staff report recommendation to index all financial thresholds in the definition for inflation on a going-forward basis; and
  
  
• In connection with 2020 amendments to the accredited investor definition, a solicitation for comment on whether the SEC should make a one-time inflation adjustment to the accredited investor financial thresholds.

The staff report covered a variety of perspectives, including feedback from public commentators, insights from the Investor Advisory Committee, and recommendations from the Small Business Capital Formation Advisory Committee.

The staff report can be found here.