In the US, an “accreditated investor” is defined as the individual who 1) had High Net Worthearned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years AND reasonably expects the same for the current year; OR 2) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). These criteria have not changed much since the 80’s and they currently allow about 7% of the US population to be qualified as such. However, the SEC is considering to modify the definition, potentially making more stringent the requirements, which could severely hinder US early stage finance market.
It has been estimated that accreditated investors currently control over $800 billion of private investments in the USA, and many of them found a new interesting deal source in securities crowdfunding platforms, which emerged in the market in the past few years. The SEC’s announcement that it might review the definition of “accreditated investors” caused some worried reactions among the start-ups and crowdfunding scene, mainly because more stringent criteria may have a negative impact on the early stage capital market, making it more difficult for entrepreneurs to raise seed finance.
However, there is no need for alarm yet. It is not a new thing that the SEC is thinking to review the defining terms of “accreditated investors”: the financial authority has been considering the matter for the past three years and it has not yet decided which direction their intervention will take. In particular, this year the SEC launched a consultation paper asking opinions on if and how the definition of “accreditated investor” should change. The main discussed points were:
The discussion on the definition of accreditated investors has been on the SEC’s agenda for the past three years. We will see if this is the year where changes will eventually be made and in which direction (hopefully not too restrictive).
References
Finalternatives (2014). Change in "Accreditated Investor" Definition Could Hurt Crowdfunding Space.
Zeoli, A. (2014). Changes to “Accredited Investor” Definition Could Clip the Wings of Angel Investors. CrowdfundInsider.
However, there is no need for alarm yet. It is not a new thing that the SEC is thinking to review the defining terms of “accreditated investors”: the financial authority has been considering the matter for the past three years and it has not yet decided which direction their intervention will take. In particular, this year the SEC launched a consultation paper asking opinions on if and how the definition of “accreditated investor” should change. The main discussed points were:
- Whether the high net worth and income measures are still appropriate criteria or whether they should be changed. The public opinion is divided on this: some say that the income and high net worth requirements are outdated and they should be increased (e.g. the net worth requirement from $1 million to $2.5 million and the current income requirement from $200,000 or $300,000 jointly to approximately $450,000 or $675,000 jointly).
- Whether sophisticated investors, that is those individuals that maybe lack the financial requirements but are knowledgeable enough about investments and their risks, should be included in the definition. This point raised another debate, specifically on how the sophistication of an investor should be evaluated. The factors that could be taken into account for this purpose are various, including ad hoc tests, current profession and educational background. The crowdfunding regulations released by the British financial authority (FCA) in March, for example, allow sophisticated investors to invest through equity crowdfunding portals, provided they passed a test which determines their sophistication level for each deal.
The discussion on the definition of accreditated investors has been on the SEC’s agenda for the past three years. We will see if this is the year where changes will eventually be made and in which direction (hopefully not too restrictive).
References
Finalternatives (2014). Change in "Accreditated Investor" Definition Could Hurt Crowdfunding Space.
Zeoli, A. (2014). Changes to “Accredited Investor” Definition Could Clip the Wings of Angel Investors. CrowdfundInsider.
About the author - Irene Tordera
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.
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