The SEC has recently indicated its plan to reevaluate who can qualify to invest in the privately-held offerings of startups. This has introduced some concerns among many about diversity and equity in this investment arena. The recent agenda to change its regulations includes a plan to modify the accredited investor definition once again to potentially limit the number of investors who will be able to engage in certain types of private offering opportunities – all to provide greater protection to investors.
There is a concern that any movement in this direction by the SEC could restrict investors from traditionally underrepresented groups and work against the goals of some to see increased diversity and equity in these markets.
In early February, the Small Business Capital Formation Advisory Committee of the SEC recommended a broadening of the accredited investor definition to satisfy concerns over equity, inclusion, and diversity in capital markets and prevent an expansion of the wealth gap.
Current Accredited Investor Wealth Criteria
The wealth criteria that qualify one as an accredited investor cover income and net worth. The income threshold of more than $200,000 USD (or $300,000 USD combined income with a spouse or spousal equivalent) was made in each of the previous two years, with an expectation of earning the same or more in the current year. The net worth threshold is more than $1 million USD individually or with a spouse or spousal equivalent, not to include the value of their primary home. In 2020, the SEC expanded how to achieve accredited investor status with some financial industry qualifications.
Additional Recommended Changes
The aforementioned advisory committee also recommended making some other changes to the accredited investor definition by adding angel group membership, investment experience, community leadership, and the holding of certain professional degrees as qualifiers for accredited investor status. The committee also restated its previous recommendation from 2019 that the income and asset thresholds be indexed periodically to inflation.
Changing Financial Requirements?
One thought is that the SEC is more likely than not to increase the income and net worth thresholds of the accredited investor definition rather than lower them, or increase the pool of potential investors.
However, one way to expand the pool of investors to those who have previously been prevented from accessing securities markets would be to enlarge the disclosure requirements to more companies.
