- July 24, 2014
- Posted by: John Fischer
- Category: Accredited Investors
The Definition of An SEC Accredited Investor” Has Stayed the Same for Decades with One Exception
An SEC Accredited Investor is part of an elite group of individuals that can invest in pretty much anything. They are considered to be sophisticated in nature and able to withstand the loss, should their investment not work out. The SEC rewards this group with the ability to invest in private offerings that the general public cannot. For example, an accredited investor is the only type of investor that is allowed to invest in Reg D Rule 506c offerings.
The definition of what makes an SEC Accredited Investor has stayed the same for decades with one exception. Previously, an investors primary residence could be included in the net worth calculation. Now, it is only taken into consideration if an investor owes more than their property is worth. In this case, the negative equity is actually deducted from the total net worth calculation. In order for an investor to be considered accredited, they must make at least $200,000 as an individual or $300,000 jointly with a spouse and have done so for the past two years. They must also anticipate their income to remain at that level for the current year. The investor may also be considered accredited if their net worth is over $1 million.
With the recent passage of the JOBS Act, creation of Reg D Rule 506, and pending SEC crowdfunding rules, the SEC is considering making changes to these requirements. Since they have not been changed significantly for over 30 years, the purchasing or investing power of an accredited investor meeting the minimum income requirements has been diminished. In other words, the requirements have not kept up with inflation. In the 1980’s $200,000 a year was considered well off. In 2014, many families need to earn this much in order to sustain in a major metropolitan area like Los Angeles or New York. The cost of living has gone up significantly, and the SEC is concerned that by following the existing definition many people are investing that cannot withstand the risk – the primary intent of creating a specific group of investors to begin with.
By using the current income and net worth criteria, there are over 8.5 million people that are considered an SEC Accredited Investor within the U.S. If it were to change for inflation this number could drop as low as 3.75 million. This would be a drastic reduction that could stem the flow of capital into companies using private offerings to raise capital. Companies, broker-dealers, and crowdfunding platforms are all concerned about the SEC taking this form of action. The JOBS Act was passed in order to increase access to capital, not to restrict it. Changing the standards now would have the opposite effect.
Companies that are looking to raise capital using a private offering should launch their campaign rather than wait. The SEC is notorious for moving slow, unless they don’t want to. Rather than waiting to see if the definition of an SEC Accredited Investor changes, raise money now while the investor pool is large. You can purchase your leads list at www.accreditedinvestorleads.com.