Accredited Investor Definition – SEC Proposal Two – Higher Net Worth and Income Requirements
As covered before in a previous post, the net worth and income requirements that define an accredited investor have remained the same for more than three decades. During that time the dollar figures for those two standards have not been adjusted for inflation. As a reminder the standards are:
- An individual with an income of $200,000 or more the last 2 years (and expects that income this year)
- A married couple with an income of $300,000 or more the last 2 years (and expects that income this year)
- Or an individual or married couple that has a net worth of $1 million exclusive of the value of the primary residence
Experts calculate the rate on inflation since these standards were set in multiple ways. Should the SEC decide to adjust for inflation even the lesser impact method would change the thresholds above to:
- An individual with an income of ~$430,000 or more the last 2 years (and expects that income this year)
- A married couple with an income of ~$528,000 or more the last 2 years (and expects that income this year)
- Or an individual or married couple that has a net worth of~ $2.1 million exclusive of the value of the primary residence
According to an SEC study published in July of 2013, Regulation D financing was used in 40,000 financings by non-financial isuers averaging a bit under $2 million each in the four years 2009-12. The total financing under this rule (the bulk of which went to meet the needs of U.S. small business) approached $80 billion over those four years. From the comparison above it is apparent that the number of individuals and families that could meet the definition of “accredited investor” would fall materially.
The SEC should be very careful in considering higher qualification minimums. The ~$80 billion mentioned above is only one part of the private offering market in the U.S. As discussed earlier in my “Heart of the Matter” post, the number of eligible households in the U.S. would shrink by more than 50%. The withdrawal of this much capital via regulation would create a huge headwind for early stage companies seeking to raise capital. Many worthy companies would not be started and others would die on the vine.
The articial capital shortage that such increases in the accredited investor income and net worth levels would cause also needs to be assessed with regard to one question. Why? It’s true that a higher percentage of households are now defined as accredited investors. Many of them don’t particpate in private offerings where this definition matters. Any of you who have tried to raise capital from qualified investors who made their money outside of tech have observed that phenomenon up close and personal.
People who make these type investments into early stage tech companies self-select into this group. They have available capital. They usually understand the early stage tech environment. They are aware of and educated about the risk they are taking. And most important, they are willing to take this type of risk. When all those things are true, why shouldn’t these investors be able to take risks that they are comfortable taking? My verdict is that the current income and net worth standards should stay in place.