In a letter to House oversight committee chairs, SEC Chair Mary Jo
White said that the Commission staff has begun a comprehensive review of the
accredited investor definition. The review will encompass, among other things,
the question of whether net worth and annual income should be used as tests to
determine whether a natural person is an accredited investor. As part of that
review, SEC staff also plans to consider and independently evaluate alternative
criteria for the accredited investor definition suggested by the public and
other interested parties. Once the review is completed, said the chair, the SEC
will consider whether to change the definition through the notice and comment
rulemaking process. As part of that process, pledged the chair, the SEC would
engage in a thorough economic analysis of the impacts of various approaches to
defining accredited investor.
Chair White’s letter was in response to an earlier letter from
Rep. Scott Garrett (R-N.J.), chair of the House Capital Markets Subcommittee
and Rep. Patrick McHenry (R-N.C.), chair of the Oversight and
Investigations Subcommittee of the House Financial Services Committee.
Section 413 of the Dodd-Frank Act requires the SEC
to undertake a review of the accredited investor definition in its entirety as
it relates to natural persons four years after enactment. Chair White expects
that the review the staff is undertaking and the feedback received through that
process will inform the Commission's consideration of whether or not to change
the definition.
The SEC chair
responded to a number of specific questions asked by Chairmen Garrett and McHenry.
The House oversight chairs contended that permitting sophisticated investors,
such as certified public accountants (CPAs) and chartered financial analysts
(CFAs) to participate in private investment opportunities would improve information
dissemination and analysis surrounding such opportunities. By excluding these
highly trained financial professionals from investing in certain offerings,
unless they meet wealth or income tests, the chairs wondered if the SEC is
placing accredited investors at risk. They also wondered whether the review of
investments by trained professionals with vested interests would help reveal
problems of an issuer.
Chair White responded that professional
certifications, such as a CPA or a CFA, are among the possible supplemental or
alternative criteria for qualifying as an accredited investor that SEC staff
will consider as part of its review. Such a certification, she acknowledged,
may position an individual to be able to analyze more comprehensively a company's
financial condition and results of operations. The question of whether those
with certain licenses, including CPAs, CFAs, and securities licenses or
degrees, should provide an independent basis to qualify as an accredited
investor will be part of the staff’s review.
Analysis of the income levels of various licensed
professions may help to evaluate the marginal impacts, including the impact on
capital formation, of allowing for this type of qualification when compared to
the current population of accredited investors. For example, certain licensed
individuals may already qualify as accredited investors because of their income
or net worth. White also noted that the inclusion of more financially
sophisticated investors in the definition of accredited investor should
increase the extent of the expert review of issuances.
Responding to a
question on liquidity, the SEC chair said that expanding the pool of accredited
investors potentially could increase the liquidity available for private market
investments, although any change in the pool of accredited investors must
consider the qualifications of the investors added to or subtracted from the
pool. The Commission staff is considering the degree to which the size and
composition of the pool of accredited investors could affect liquidity and
issuers' ability to raise capital through private offerings. This consideration
will include an analysis of the potential overlaps in the various pools of
investors that could exist under various definitions.
For example, if there is significant overlap with
the set of individuals who would qualify under an income or net worth test,
then including criteria other than income and net worth to determine whether an
individual meets the accredited investor standard may not materially change the
pool of accredited investors. If, however, including criteria other than income
and net worth seems likely to increase the pool, then further analysis could
include evaluating possible investment levels by those additional investors,
and evaluating potential impacts on capital formation.
Responding to a congressional query on whether reliance on a qualified broker
or registered investment adviser should enable ordinary investors to participate
in Regulation D Rule 506 offerings, Chair White assured them that question is
one of many factors that the staff will consider.
White added that obtaining the advice of a
professional adviser may enhance an investor's ability to make an informed investment
decision, and therefore strengthen investor protection in Rule 506 offerings.
White cautioned, however, that an investor's use of such an adviser may not
necessarily measure the investor's understanding of the risks of the
investment. As part of its review, the staff may determine that it is feasible
to analyze the extent to which investors file claims against professional
advisers arising from investments in unregistered offerings. Such an analysis
may assist in evaluating the level of protection afforded to investors when
relying on professional advisers.
Noting that the Regulation D 506
market raises equity capital in excess of one trillion dollars annually, a
level exceeding that of the combined public debt and equity markets, the
representatives asked the macro question of whether diminishing the pool of
eligible investors could potentially harm U.S. GDP.
Chair White replied that the staff review of the
definition of accredited investor will consider the potential economic
consequences of using alternative criteria to qualify as an accredited
investor. Indeed, understanding these potential economic consequences will be
an integral component of the review, and an essential part of the staff’s work
during this process.