The SEC’s “accredited investor” definition bars investors who earn less than $200,000 a year or have a net worth less than $1 million from taking part in private securities offerings. It’s a definition even its mother no longer loves: SEC Commissioner Elad Roisman says it “stands between millions of Americans and opportunities for them to invest their wealth in private offerings,” while SEC Commissioner Hester Peirce calls it “one of the more offensive concepts lurking in our federal securities laws.” Although the definition was intended to offer “investor protection,” it has instead “shut out all but the wealthiest from upside gains that private companies have made over the last several decades,” according to Roisman.
In light of such negative opinions from inside the SEC, one might have expected a proposed amendment to the rule to be dramatic. Currently, the SEC’s rules define an accredited investor as any natural person: (i) whose net worth, individually or with spouse, exceeds $1,000,000 not counting his primary residence or (ii) who had an individual income of more than $200,000 individually (or $300,000 with spouse) for the past two years and expects to receive the same income this year. But, after taking more than a decade to reconsider it, the SEC’s proposal merely expands this old definition, adding certain financial services professionals to the ranks of those well-to-do persons already permitted to invest in private offerings. This is the wrong approach.
The right approach is the most simple: eliminate the accredited investor definition altogether. Permit investors to make their own investment decisions. Far from undoing “investor protection,” this change would be one that investors—especially less wealthy ones—would have every reason to welcome.
To understand why, let’s start with a bit of background. (For a more in-depth background reading, see this policy analysis.)
Read the rest of this post →