The Securities and Exchange Commission announced that it has issued a new staff report on the definition of an accredited investor.
In a news release, the SEC noted that it is directed under the Dodd-Frank Wall Street Reform and Consumer Protection Act to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted.
Under the federal securities laws, only persons defined as accredited investor may participate in certain securities offerings. This is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering. Under current regulations for being accredited, individual investors must have earned income exceeding $200,000 per year or have a net worth of over $1 million.
According to the newly released SEC staff report, the number of accredited investors has grown from 1.51 million since the criteria were first developed 40 years ago to 24.3 million households in 2022.
The report states that the increase is “largely due to the fact that the natural person accredited investor thresholds have not been adjusted to reflect inflation.”
It was determined that If the natural person accredited investor thresholds were adjusted to reflect inflation since they were initially adopted through 2022, “the net worth threshold would increase from $1 million to $3,037,840, the individual income threshold would increase from $200,000 to $607,568, and the joint income threshold would increase from $300,000 to $911,352.”
The report also notes the fact that a significant portion of investors’ assets are retirement savings held in individual retirement accounts and defined contribution plans, which was not the case in 1982. 34% of retirement assets were in IRAs at the end of 2022 compared to 2.5% in 1980.
The report concludes with a review of frequently suggested revisions to the accredited investor definition received from a variety of sources
At its recent meeting, the SEC’s Small Business Capital Formation Advisory Committee considered various recommendations for expanding the definition of accredited investor in order to make it more inclusive and allow greater access to the private capital market for ordinary investors. Proponents of revising the rule say it would lead to a greater number of investors who can provide funding for start-up companies and other businesses.
Among the ideas being considered are establishing a certification exam to earn the status of accredited investor, and raising the thresholds for net worth and earned income for the first time in over 40 years.
The SEC staff previously reviewed the definition of accredited investor in 2015 and in 2019.
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