The SEC has proposed expanding the definition of “accredited investor” to include investment advisers and licensed professionals, among other new categories. The SEC did not propose changing or indexing the $200,000 income or $1,000,000 net worth test. The proposal includes the estimated 13,400 SEC-registered investment advisers and approximately 17,500 state-registered advisers in the definition of accredited investors, but the proposal does not include exempt reporting advisers. The proposal also includes financial professionals who have their Series 7 or 65 licenses. Additional new categories include knowledgeable employees of private funds, certain family offices, and a catch-all category for entities owning at least $5 Million in investments.
This proposal is a good start, but we urge the SEC to go further. The income and net worth tests unduly restrict lower net worth, but knowledgeable, individuals from investment opportunities, while failing to protect wealthy, but unsophisticated investors. Rather than the income and net worth tests, the SEC should consider knowledge, background and financial sophistication as litmus tests for accredited investor. We believe that the burden should be on the investor to make representations, upon which an issuer could rely, to determine whether s/he is sophisticated enough. Alternatively, the SEC could develop a financial quiz that potential investors would have to complete before becoming accredited.