The Securities and Exchange Commission (SEC) recently released a staff report reviewing the definition of "accredited investor" in Rule 501(a) of Regulation D under the Securities Act of 1933 (Securities Act), as required at least every four years by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC previously reviewed the definition of accredited investor in 2015 and 2019, with significant amendments to the definition being issued in 2020 (for a discussion of the 2020 amendments, see our alert from August 28, 2020, "SEC Expands the Definition of Accredited Investor"). While the staff report released on December 14, 2023, makes no recommendations for changing the definition of accredited investor, it does discuss several proposals to amend the definition and request comments from the public.
The Securities Act requires that all offers and sales of securities must either be registered with the SEC or fall within an exemption from registration. The definition of accredited investor in Regulation D of the Securities Act sets forth multiple categories of exemptions intended to demonstrate that qualifying investors have sufficient financial sophistication such that the Securities Act’s registration process and related protections are unnecessary. The definition is not only a cornerstone of Regulation D but also plays an important role in other securities laws, including Regulation Crowdfunding,1 Regulation A Tier 2 offerings,2 the Uniform Securities Act of 2002, and the Financial Industry Regulatory Authority Rule 5123.
Based primarily on a review of filings made in connection with Regulation D exemptions, the staff report provides data on the number of U.S. households that meet the definition of accredited investor and evaluates whether current securities market practices are providing sufficient investor protection. For example, the report states that 1,510,000 households (or 1.8% of all U.S. households) qualified as accredited investors in 1983, and the number of qualifying households increased to 24,300,000 (or 18.5% of all U.S. households) by 2022. The significant increase is attributed largely to the fact that income and net worth thresholds under the definition have not been adjusted to reflect inflation, raising concerns that inflation and other financial factors are inflating the accredited investor pool while investors may not be as sophisticated as their sizeable assets would seem to reflect. The report further states that if accredited investor thresholds are not adjusted for inflation going forward, an estimated 30% of U.S. households will qualify as accredited investors by 2032. The SEC acknowledges that these estimates are limited by multiple factors, including the lack of comprehensive data on the Regulation D market and the characteristics of the accredited investor pool.
Although, as noted above, the staff report makes no recommendations, it does discuss a number of previous proposals concerning the definition of an accredited investor, prompting further input from the public. For example, the report recounts that the review conducted in 2015 suggested amending the definition to index all financial thresholds for inflation on a going-forward basis every four years3 and that the same suggestion was made during the 2019 review.4 The report addresses public comments received by the SEC during the 2015 and 2019 reviews, as well as insights from the SEC’s Investor Advisory Committee and Small Business Formation Advisory Committee, and concludes by encouraging public comment regarding matters discussed in the staff report.
The December 14, 2023 SEC staff report can be found here.
1 see 17 CFR 227.100(a)(2).
2 see 17 CFR 230.251(d)(2)(i)(C).
3 see "Report on the Review of the Definition of “Accredited Investor,” Dec. 18, 2015.
4 see "Concept Release on Harmonization of Securities Offering Exemptions," Release No. 33-10649, June 18, 2019.
