On October 9, 2014, the Investment Advisory Committee of the SEC issued its much awaited recommendations on the “Accredited Investor” definition of Regulation D of the ’33 Act. This is in response to the SEC’s Request for Comments on the definition of “Accredited Investor” in its release relating to Proposed Rules for Regulation D and Form D, which mainly related to general solicitation (for the full text of that release, see here). Since then, there have been numerous comments and concerns relating to proposals that would increase the wealth and income levels needed to qualify as an Accredited Investor – many asserting that a dramatic increase would severely hurt the ability of emerging companies in the US to attract the investment capital they need to build their businesses.
First, the recommendations are just recommendations – the first in a potentially long process of determining whether to amend the Accredited Investor definition. The report is a thoughtful approach to the issue, though slightly worrisome (to this writer) in that some of the recommendations may add complexity to what is now a fairly simple process. The recommendations emphasize that the SEC should determine which investors truly need the protection of the ’33 Act and should revise the Accredited Investor definition to include “financial sophistication” as an important element of the definition. For example, the recommendations cite as possible indications of “financial sophistication” industry experience, tests like the Series 7, investment experience or participation in angel groups that follow designated best practices, etc. In addition, the recommendations discuss financial thresholds – questioning whether a percentage-based threshold should be considered or whether other assets, such as retirement plans, should be excluded from the calculation of the thresholds (in the same way that the value of the investor’s primary residence is currently excluded).
But there is much more. For the full text of the recommendations, see here. In addition, the Angel Capital Association has been very involved in commenting and analyzing this issue. You can view their website at www.angelcapitalassociation.org.