The U.S. Securities and Exchange Commission (SEC) is contemplating adjusting the monetary thresholds for accredited investors. This change, if implemented, may increase the base criteria for individuals and entities to qualify as accredited investors, potentially making it more difficult for private investors to participate in private securities offerings.
What is an Accredited Investor?
By definition, an accredited investor is a person or a business entity that is allowed to deal and trade securities that may not be registered with financial authorities. These investors are recognized on the fundamental premise of their high net worth value, asset size, governance status, or professional expertise. The U.S. Securities and Exchange Commission (SEC) allows these entities to participate in higher risk investments like crowdfunding, private placements, and hedge funds.
At present, the SEC, under Rule 501 of Regulation D of the Securities Act of 1933, deems an individual as an “accredited investor” if the person has earned an income exceeding $200,000 (or $300,000 in combination with a spouse) in the past two years, and has a reasonable expectation of attaining the same lucrative amount in the upcoming 2 years. Alternatively, a person is considered an accredited investor if his or her net worth or combined net worth with a spouse exceeds $1 million, excluding the value of a primary residence. However, changes may be forthcoming.
Alteration in Thresholds
The SEC is considering recommending changes to the definitions, following periodic assessments to deem whether or not adjustments may be warranted with respect to the existing thresholds. If the SEC chooses to raise these thresholds, several individuals and entities who currently meet the criteria would no longer qualify. Consequently, this could limit the pool of potential investors for private offerings.
In past years, several factors have remained untouched—individual income ($200,000 or $300,000 with a spouse) and net worth excluding the value of the primary residence ($1 million)—since their establishment in the 1980s. Now, these amounts might be bumped up to account for inflation and changes in the economic climate. The Securities and Exchange Commission has yet to reveal the exact amounts they are reviewing or if these changes will ultimately be applied.
Impact of Changes
The potential increase in minimum criteria may limit the investment opportunities for several private investors. Present-day, these investors have the opportunity to participate in certain types of investments, such as private placements, crowdfunding, and hedge funds, which are not available to non-accredited investors. Nevertheless, if the standards become more stringent, fewer individuals will qualify, thereby reducing the number of potential investors. Hence, this might affect negatively businesses and entrepreneurs who rely on funding from these investors.
On the flip side, this change could lead to the development of a more robust and economically secure investor landscape, since accredited investors by default would likely have more fiscal liabilities. This in turn might result in more substantial and more secure investments in private placements and other “unregistered” investment opportunities.
The Response from the Investment Community
This contemplated change has already generated substantial discussions and debates in the investment community. Some individuals and entities argue that these changes may potentially inhibit entrepreneurs from successfully reaching their financial goals and may tighten overall market liquidity.
Contrariwise, others assert that this change would essentially protect the investing public from engaging in high-risk investments. By lifting the thresholds, one could argue that only financially sophisticated and capable investors would participate in private offerings, thus reducing the risk of significant financial losses to naive investors.
The Pros and Cons
On account of this, one question remains: Is this potential shift a boon or a bane?
Advocates assert that increasing the bar for who qualifies as an accredited investor would minimize the potential harm to unskilled investors who might fail to comprehend associated risks. This change would essentially protect the less informed, ensuring that only people with significant financial adeptness and assets would be allowed to participate in more complicated, riskier investments.
However, opponents of this potential adjustment argue that these changes would constrict the pool of investors, additionally restraining entrepreneurs and small business owners from reaching their investment goals. They believe that navigating through the already complex investing landscape is tough for most start-ups and small businesses. Therefore, raising the benchmark might deter these ventures from even attempting to raise funds, restricting their chances for success in the long run.
Conclusion
The bottom line is—the ongoing debate points toward a need for maintaining a balance. While there’s certainly a necessity to safeguard those who might not be aptly equipped to navigate the investment space, it’s equally essential not to stifle the entrepreneurial spirit by limiting access to capital. It will be exciting to see what the SEC decides moving forward, and how it manages to strike this balance. With the paramount role the SEC plays in maintaining order in finance, the decision could have a significant impact on the future of investing. Until then, one can only speculate and prepare by understanding all possible implications.
