The Release also invited comments on the definition of accredited investor. The definition will likely be addressed in future rulemaking endeavors. Currently, individuals can be come accredited base upon income or net worth. The definition has been complicated by the fact that the standards for determining net worth and income are also used to determine investment limits in the context of crowdfunding.
There have been no changes to the dollar amounts used to determine accredited investor status since the 1980s. As a result, the amounts have been effectively reduced through inflation, significantly increasing the number of investors who meet the standard.
The most problematic portion of the definition concerns net worth. Investors can have a high net worth because of the ownership of illiquid assets (land but not the primary residence) or assets in retirement accounts. To the extent having sufficient assets but little income, investors acquiring securities in private offerings under Rule 506 will need either to borrow or to invade illiquid accounts.
Changes in the dollar threshold need to be considered. In addition, however, the Commission should begin the process of excluding assets from the net worth calculation that do not provide sufficient indicia of sophistication or that should not be used in connection with private offerings under Regulation D. Most noticeably, this ought to apply to assets in retirement accounts.
Investors who are retired or close to retirement may qualify as accredited primarily or solely because of these assets. Given the increased risk and accompanying illiquidity of offerings under Regulation D, restricted securities sold pursuant to these exemptions will generally not be an appropriate investment for many such individuals. Moreover, to the extent cash poor, retirees seeking to invest may be encouraged to liquidate retirement assets, potentially replacing low risk investments with high risk securities.
The accredited investor test is designed to use income and net worth as an objective substitute for sophistication. Investors who meet the test primarily because of retirement assets do not have sufficient indicia of sophistication. As a result, the asset should be removed from the calculation. In addition, consideration should be given to the exclusions of funds recently withdrawn from retirement plans, much the way Rule 501 addresses equity from the primary residence.
For more commentary on the rule proposal, see Data Collection, the SEC, and Regulation D: A Comment on Securities Act Release No. 9416 (July 10, 2013).