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» SEC is Considering Revising Accredited Investor Criteria

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According to a letter from SEC Chairman Mary Jo White to Rep. Scott Garrett, R-N.J., and Rep. Patrick McHenry, R-N.C, the SEC is considering revising accredited investor criteria for becoming an accredited investor. This could be monumental for businesses trying to raise capital.  If the SEC changed the criteria, and allowed more investors to qualify, the pool of potential investors would increase dramatically as would the available capital.

In her letter Chairman White wrote, “Professional certifications, such as a [certified public account] or a [chartered financial analyst], are among the possible supplemental or alternative criteria for qualifying as an accredited investor that commission staff will consider as part of its review. Such a certification may position an individual to be able to analyze more comprehensively a company’s financial condition and results of operations.”

Include People with Professional Certifications, such as CPA’s

The statement by Chairman White makes sense.  The SEC is tasked with protecting the public from bad investments which is why the Accredited Investor Rule exists in the first place. The belief is that people with a higher net worth will be more financially astute and able to analyze the risk associated with an investment.  Adjusting the criteria to include people with professional certifications in the financial industry simply makes logical sense.  These professionals understand how to analyze investment risk perhaps far better than an Accredited Investor that makes more money working in a different field, such as a doctor.  They are dealing with financial calculations on a daily basis and therefore should be considered financially savvy enough to invest.

Using a Financial Advisor

The SEC also appears to be considering the effectiveness of using a financial advisor to make an investment decision and whether or not this could provide enough value for someone to be considered an Accredited Investor.  In her letter Chairman White went on to say, “Obtaining the advice of a professional adviser may enhance an investor’s ability to make an informed investment decision and therefore strengthen investor protection in [private] offerings.  An investor’s use of such an adviser, however, may not necessarily measure the investor’s understanding of the risks of the investment.”

Investment Equality

Many investors have complained for years over the Accredited Investor rule and the accredited investor criteria because it prevents people that have investment knowledge from participating in private offerings that only the rich have access to.  Not allowing smart professionals to participate in private offerings because they have not yet made enough money will potentially prolong the time it takes for them to make that money. It also does not mean that they do not have the understanding to be a sophisticated investor.

Warning from Consumer Advocacy Groups

The Director of the Consumer Federation of America, Barbara Roper, made this statement, “It just does not work.  We have been down that road before. It led to the Great Depression.”  Those in consumer advocacy, like Director Roper, are concerned that the existing qualifications for being an Accredited Investor may be too lax to protect investors now.  Opening the door to expanding the definition of sophisticated investors could only lead to more fraud and investors losing capital.

SEC Taking Comments

The SEC is accepting comments from all sides and weighing out whether or not it is wise to change the definition of Accredited Investor and the accredited investor criteria in any way.  Your voice counts so send your comments to the SEC.

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