The Securities and Exchange Commission (SEC) has scheduled an open meeting of the Commission to address several regulatory issues including an update to the current definition of an Accredited Investor.
Regarding the Accredited Investor definition the SEC states it will consider:
“whether to adopt amendments to the definition of “accredited investor” in Commission rules and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act to update and improve the definition to identify more effectively investors that have sufficient financial sophistication to participate in certain private investment opportunities. The amendments are the product of years of efforts by the Commission and its staff to consider and analyze possible approaches to revising the accredited investor definition.”
Currently, an Accredited Investor is determined off a wealth metric. An individual who earns over $200,000 a year, or has a net worth of over $1 million (minus their primary residence), is deemed accredited. If the individual is married, the salary metric rises to $300,000. Individuals who are accredited may participate in certain exempt offerings like securities issued under Regulation D – an enormous market of over $1 trillion annually.
While the wealth metric is currently in place in an attempt to defend individuals the government believes are not capable of making these types of investment decisions, it is widely believed the metric misses the mark as sophistication is obviously a far better metric.
Individuals who have the experience, or education, to assess investment risk are understandably better positioned to make decisions on more esoteric investment opportunities.
As private markets have boomed, and public securities have waned, a generation of retail investors has been boxed out of some of the most promising investment opportunities. Some observers believe the current definition has acerbated the wealth disparity as private securities have grown in popularity for institutions and the very wealthy. Even in light of this, some individuals believe the government should make it more difficult for even highly sophisticated individuals to purchase private securities.
Any update or change to the definition will be closely watched by the industry engaged in capital raising including online capital formation.
The second item to be considered by the Commission is:
“whether to adopt amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items, which have not undergone significant revisions in over 30 years, would be updated to account for developments since the rules’ adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.”
Regulation S-K reporting requirements have become increasingly arcane. The Commission may attempt to make reporting requirements more approachable to a wider audience.
The meeting of the Commission will take place on August 26, 2020, at 10 AM ET and is open to the public as it will be live-streamed on the SEC website.