Accredited Investor: Two Tier System Coming?

The staff of the SEC has issued its report on the definition of “accredited investor.”

It could be what we are looking at is the following: a “super accredited investor” definition (credit to Bill Carleton for coining this term), and the current definition–but if you don’t qualify as a “super accredited investor” you will be subject to investment limitations.

Here is what the SEC said about the “super accredited investor” idea:

The staff believes that the financial thresholds should be adjusted to reflect inflation to be consistent with the Commission’s 1982 and 1988 policy choices. The staff also believes that the potential alternative criteria identified below could provide adequate avenues for sophisticated individuals to qualify as accredited investors. The Commission could consider adding new inflation adjusted income and net worth thresholds. Thresholds such as $500,000 for individual income, $750,000 for joint income and $2.5 million for net worth would reflect inflation and maintain the ratios in the current definition. Under this approach, individuals who meet the new income or net worth thresholds would not be subject to the investment limitations suggested in paragraph A above.

And here is the SEC’s investment limitation proposal:

The Commission could consider leaving the current income and net worth thresholds in the accredited investor definition in place, but limiting investments for individuals who qualify as accredited investors solely based on those thresholds to a percentage of their income or net worth (e.g., 10% of prior year income or 10% of net worth, as applicable, per issuer, in any 12-month period).

Are these good ideas?

In general, I don’t think indexing the financial thresholds to inflation is a good idea. Slowly over time we will just define out of the category angels whose income or net worth doesn’t beat inflation.

If we had to choose between indexing and investment limitations, I would choose the investment limitations.

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