House of Representatives Pressing SEC to Broaden Definition of Accredited Investors

Clark Hill PLC
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For several years now Congress has been at odds with the Securities Exchange Commission over reducing barriers to capital formation of new businesses in America and increasing access of everyday citizens to private investments that may fail but also may create substantial wealth.

On Monday, February 1, the House of Representatives shot the latest salvo at the SEC by overwhelmingly approving legislation that would broaden the legal definition of those who can invest in risky private investments with minimal SEC supervision of the stock offering: Accredited Investors (the vote was 347 – 8 in the House, who has heard of that sort of consensus recently?).

Currently, an Accredited Investor is a person (i) whose adjusted gross income for the past two years, with a reasonable expectation for the year of investment, is at least $200,000, or (ii) whose adjusted gross income on the same basis with the investor’s spouse is $300,000; or (iii) who has a $1M net worth excluding the value of their principal residence.  There have been indications that the SEC views these numbers as out of date and would like to increase them so that persons making risky private investments with little SEC supervision are really wealthy in today’s world (versus what those income and wealth numbers meant decades ago when they were adopted).

The House of Representative’s legislation would create two new categories of Accredited Investor:  anyone with a securities license and investors with professional knowledge and experience related to the specific business that is issuing the securities.  The exact contours of that latter category are not entirely clear.  But what is clear is the Congress continues to pressure the SEC to balance investor protection and investor access to opportunities in ways that broaden the ability of individual main street investors to directly take investment risks from which they have been excluded by existing SEC rules.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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