Just when you think you are close to becoming an accredited investor, the SEC may be boosting its requirements. In this article will look at how much they are considering raising the financial requirements, and what your options if they do.
On December 15, 2023, the Securities and Exchange Commission (SEC) released a significant staff review of the definition of an accredited investor. Mandated by the Dodd-Frank Act, this review recurs at least once every four years. But what exactly is an accredited investor, and why does this definition matter?
Defining the Accredited Investor
Let's start by reviewing the basics. The definition of an accredited investor plays a crucial role in determining who can invest in specific securities offerings. It aims to ascertain whether investors possess the requisite financial sophistication and capability to bear potential losses or navigate investment decisions independently. Consider it a financial IQ test with higher stakes and fewer multiple-choice questions. Individuals can qualify as accredited investors under federal securities laws through income or net worth thresholds or by holding specific credentials or positions within a company. Because apparently, having a fancy title means you're automatically better at handling your money.
Key Focus Areas of the SEC Review
Let's get to the heart of the matter. Firstly, the review dove headfirst into the impact of inflation on the income and net worth thresholds for individuals seeking accredited investor status. It's like watching your bank account shrink while your grocery bill grows. For instance, adjusting for inflation would significantly elevate these thresholds. The new proposal: the net worth threshold, excluding primary residence, could skyrocket from $1 million to approximately $3 million, while the individual income threshold might rise from $200,000 to roughly $607,000. Remember when being a "millionaire" sounded impressive?
Assessing Financial Sophistication
Secondly, the review considered whether accredited investors possess the financial acumen, risk tolerance, and access to information necessary to navigate unregistered offerings without the additional protections afforded by registered offerings like Initial Public Offerings (IPOs). Moreover, it discussed accredited investor participation in exempt securities markets and addressed proposed revisions to the definition.
Implications and Potential Revisions
So, where do things stand? The staff review doesn't propose or advocate for changes to the accredited investor definition. However, the SEC's Regulatory Flexibility agenda hints at potential regulatory adjustments, including revisions to the definition, in the forthcoming year. Yeesh.
Adjusting the wealth thresholds and definition for inflation could significantly impact the percentage of households qualifying as accredited investors. Approximately 18.5% of households qualify, but if adjusted, this figure would decrease dramatically to around 5.5%, compared to just 1.8% in 1983. Talk about keeping everyone out of the 1%.
Stakeholder Engagement
For those interested in providing feedback on the review, the SEC encourages contacting the staff to share comments. Additionally, to gain a deeper understanding of the accredited investor definition and related capital raising issues, the SEC invites exploration of resources available on its capital raising hub. That sounds like a great way to spend a Saturday night.
Is There Another Option?
One option is to sit and pray that this doesn't come to fruition. I'm still holding out hope. Option 2: Professional Designations: Professional certifications or designations can grant accredited investor status. For instance, individuals with licenses such as Series 7, Series 65, or Series 82 may qualify. These licenses typically indicate expertise and understanding of financial markets and securities. i.e., you're going to have to put in the work.
Ready to go back to college?
Attaining licenses such as Series 7, Series 65, or Series 82 typically involves completing specific education requirements and passing the corresponding licensing exams. Here's an overview of each:
Series 7: Administered by FINRA, this license allows individuals to sell various securities products. Candidates must be sponsored by a FINRA member firm, pass the Series 7 exam covering investment products and regulations, and meet eligibility requirements.
Series 65: Also administered by FINRA, this license is required for those providing investment advice on a fee basis. There's no sponsorship requirement; candidates register directly with FINRA, pass the Series 65 exam covering investment strategies and compliance, and may need to register with regulatory authorities.
Series 82: Administered by FINRA, this license permits participation in private securities offerings. Candidates must be sponsored by a FINRA member firm, pass the Series 82 exam covering private placements and securities regulations, and meet additional registration requirements.
Candidates prepare for these exams through study programs, pass the exams at authorized testing centers, and, upon passing, may engage in activities regulated by the respective licenses.
Conclusion
My thoughts? It's an election year, and candidates want to remain popular, so they won't rock the boat. This qualifies as a game-changer, so it will likely be postponed. Having more money doesn't always equate to making more informed decisions. Further, risk carries many unknowns, so even being the smartest guy in the room doesn't always protect you from unforeseen events. But the bottom line is that the more money you have, the more you can stand to lose.
And I'd like to leave those who see this as bad news with some good news. Fortress Federation offers plenty of 506b offerings (open to non-accredited investors) because we want to include our friends, family, and investor community. These offerings are every bit as good as our 506c deals. So, if you haven't scheduled a time to chat with me, let's take care of that. I don't bite, and it solidifies you as a sophisticated/non-accredited investor in our community who can move forward in our 506b offerings.
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