Last Updated on July 20, 2017 by John Fischer
Accredited Investor Definition
Investing in private companies holds an uncertain promise as the SEC scratches its chin over a developing debate. The 2012 JOBS Act changed the rules for private placement offerings by allowing companies to more aggressively promote their offering to accredited investors; but the qualifications an investor must meet in order to receive accreditation have remained unchanged for 30 years. Public outcry for a change to the accredited investor definition is growing, and for good reason.
Should Qualifications Be Tightened Or Relaxed?
According to a recent article in Forbes, a number of business leaders in the up-and-coming crowdfunding arena seem to agree that, if any changes are to be made at all, qualifications should only be relaxed. This would essentially mean that more individuals or investment groups can participate. New crowdfunding initiatives can potentially allow investors to join in with reduced financial requirements, meaning more investors with the means to participate.
The argument for inclusiveness suggests that educational (rather than financial) requirements can protect the interests of the investors. This simultaneously allows for more participation and thus more ready funding for startups (and, one hopes, economic prosperity for years to come). While a simple financial requirement sufficiently reflects an individual’s ability to make money, it does not account for the investor’s knowledge of the company or the offering being made.
What’s The Current Accredited Investor Definition?
The current qualifications for accredited investors are based on net worth and annual income for an individual or household. Annual income for an individual is set at $200,000 for two years with reasonable assurance that it will continue, or, alternately, a combined income of $300,000 for a household. The net worth requirement is set at $1,000,000 (excluding the value of a home). As you may have noticed, these qualifications say nothing of the experience or knowledge of the investor. These are strictly number-based qualifications.
Some of the reasoning behind the SEC’s consideration and adjustments are that economic conditions have changed significantly since these qualifications were first put in place. Currency values have changed as well; therefore, new rules should be put into effect. However, new rules can either encourage or discourage investment. The SEC is in the unenviable position of deciding whether emphasis should be placed on financial resources or investment experience and knowledge.
Would Fewer Accredited Investors Be Such A Bad Thing?
SeedInvest, a crowdfunding platform specializing in connecting accredited investors with worthy startup companies, has recently reached out with social media to effectively encourage the SEC to lower financial requirements for accredited investors. Instead, SeedInvest suggests some alternatives including: tests, licenses, or specific distinctions from government agencies or State Securities Administrators. The determination here is based on “financial sophistication,” which cannot be fully determined based on financial numbers alone.
Should the financial requirements be raised by the SEC, SeedInvest forecasts a drop from 8.5 million to 3.7 million accredited investors. As part of their social media campaign, SeedInvest warns that if such stringent qualifications are enforced that they will “kill job creation and economic growth.”
The potential for economic growth and job creation are difficult to ignore. Common wisdom indicates that any advances in technology, such as new crowdfunding platforms, should be given a chance to expand. Conversely, the pitfalls of new developments have not been fully accounted for. Social media resources are available, but as of yet are only loosely regulated. The SEC has a lot of conflicting information to consider.
What new qualifications will ultimately mean for the future of private placement offerings is uncertain. If we are to follow the information provided by companies like SeedInvest, we can be sure that the current financial restrictions placed on accredited investors only reduce ready capital for startups. What a steadily diminishing source of capital for new US businesses means for the future has yet to be fully seen, but it doesn’t look good.