Update on Accredited Investor Definition – Advisory Committee Passes Recommendations, SEC Itself Hasn’t Acted

By: Marianne Hudson, ACA Executive Director

Last week, the Investor Advisory Committee to the SEC approved several high level recommendations on the accredited investor definition.  You can download a copy of the recommendations here.  I attended the meeting and want to give our members a quick update on this very important issue for angels.

First, it is important to note that this meeting is another piece of a long process – there are no new rules from the SEC that change who can be an accredited investor at this time.  We’re watching the process and representing the views of angels and startups and appreciate that many of you, our members, have shared your voice.

The timing for any changes or some official ruling seems as elusive as ever.  It appears that any changes are months or maybe years away rather than days or weeks.  One of the possibilities is even that there won’t be any changes for some time.  So it is important to stay involved and watching, but to put any concerns about changes in this context.

There were a couple of very encouraging themes in the recommendations and discussions during the meeting:

  • There is an interest in expanding the accredited investor class and not contracting it from this committee.
  • The lead person for the recommendation, Barbara Roper, and others spoke favorably about angel investors and angel groups that use best practices (she didn’t say this, but think of groups that fit ACA’s new “Established Angel Group” certification program).
  • The committee recommendations were “very different today than they would have been nine months ago” based on the input of many.  It was great to hear that the input of angel groups clearly had an impact on the process and the thinking.

The advisory committee’s recommendations are high level, what I would call 30,000 foot level advice to the SEC.  They suggested a number of options for the SEC to consider and develop the details for, and that multiple options could be part of any final definitions.  Here is a quick overview from my vantage point (with more commentary in a joint live blog with Joe Wallin, an attorney and member of ACA’s public policy advisory council):

  • Wealth and income thresholds – No specific changes were recommended, although the SEC should carefully evaluate these levels.  In addition, “the current definition’s financial thresholds serve as an imperfect proxy for sophistication, access to information, and ability to withstand losses.”
  • Sophistication – The definition should focus on financial sophistication, with a variety of potential means from professional experience, education, or credentials.  This is where angel groups were mentioned among the options.  So were some kind of test, series 7 securities license and the Chartered Financial Analyst designation.
  • Alternative approaches – To address sufficiency of liquid assets, the SEC could also consider options that either limit the percentage of assets that can be invested annually or removing retirement accounts from the calculation of net worth in order to reduce the likelihood of investors taking unaffordable losses.

The Investor Advisory Committee also recommended that the SEC’s proposed rules on Form D be published as final rules in order to get better data on Reg D offerings.  You may recall these would require issuers to file an advanced Form D 15 days before generally soliciting, providing all fundraising materials, etc., with the potential penalty of losing the right to raise capital for a year.  ACA is on record that this rule would be disastrous for startups and should not become a rule.

ACA was happy to see mention of the sophistication concept, as this could grow the accredited pool – or at least continue angel investing at a good level should financial thresholds be raised.  The key of course is in the details – we want to ensure that sophistication measures are common sense and easy to administer for all involved.  The alternative approaches are not so positive in our estimation.

ACA will soon provide another letter to the SEC on this issue. Of course our preference is for no changes to the current definition, but we think it is important to provide more feedback on making financial sophistication a practical and useful tool to build capital formation for startups and to discuss why some of the alternative approaches are not a good idea, and certainly that the proposed Form D rules should not go forward.

As we learn more about the process and any information about timing, we will keep our members informed.  We will also provide more detail and answer your questions in a Webinar on November 5 – stay tuned for details.  Keep providing your thoughts about this issue to the SEC and Members of Congress.  Thanks for your support on this important issue!