Today the SEC issued its report on the definition of an “accredited investor” under the Securities Act of 1933. This report is not only a cautionary tale for the future of capital raises exempt from substantial SEC regulation, but also the most interesting work of social commentary I have ever read. Please ignore what you suspect is hyperbole and download today’s report (“Review of the ‘Accredited Investor’ Definition under the Dodd-Frank Act” from http://www.sec.gov
This 53 page report is replete with analysis of two things:
*the regulatory scheme presently in place which permits companies to raise money from individuals who are “accredited” (people we described pre-Regulation D as “rich and smart” and who now are defined by their income, net worth or professional qualifications as not needing protection of an SEC registered offering) and
*a startling economic analysis of the distribution of wealth in the United States over the past two decades and the next three decades.
I may post fascinating details in the coming week, but here is the crux of the matter:
*inflation has made the economic criteria for being accredited as an investor far too low (as an example of various measures of wealth, an individual today need earn $200,000 per year to be accredited which captures a surprisingly large share of the US population, far more than contemplated when the current standard was set up and grossly inadequate over the next 30 years per projections) and
*although the amended standard for measuring wealth now excludes home equity in the net worth test of $1,000,000, much personal wealth today is tied up in benefit plans or IRAs not invested by the individual but by professional designees, and the individuals lack financial sophistication in investments which were presumed, in the beginning, to be a proxy for someone who was knowledgeable in investing and risk evaluation.
Speculation from the tone of the Report: if I were the SEC, I would radically increase the financial standards for declaring a person accredited, increasing income requirements, or the alternate definition of net worth to exclude certain retirement accounts. The effect of such action would sharply reduce capital available for emerging companies. Note that 99% of all investors in Regulation D offerings (by far the most popular fundraising vehicle for early stage enterprises) are, per SEC estimates, defined as accredited. (There is also, it should be noted, a movement to DECREASE the threshold as a matter of equity, to afford investment opportunity to certain areas of the country or certain historically deprived segments of the population where reaching the present standards of wealth are not being met.)
Finally, a spoiler alert culled from the plethora of data in the Report to highlight the disconnect between the SEC current standard for “accredited” status and the concept that such status is a proxy for wealth and sophistication: using the $200,000 individual threshold, in 1983 one half of one percent of US households would be accredited; in 1989, 1.5%; in 2022, 13.8%; in 2032, projected as 23.9%; in 2042, projected 41.1%; in 2052, projected 58.5%.
I offer no comment on the impact on retirement planning that these projected numbers suggest for people whose life horizon reaches far into the future– a subject for another day.