March 3, 2015
There is significant evidence to suggest that a thoughtful revision of accredited investor standards will enhance capital formation while continuing to maintain appropriate levels of investor protection. As such, the Commission has an opportunity to serve both of its mandates, often seen as mutually exclusive of one another. To achieve this outcome, the revised criteria must be independently verifiable, be uniform and demonstrate a proven, observable relationship to a base of sophisticated investors.
Accredited investors first earned their designation at a time when there were few proxies for individual financial sophistication. Today, the information age has combined with explosive growth in the capital markets to raise financial literacy to unprecedented levels. Access to and interpretation of investment-related data is widespread and inexpensive. Investing concepts have proliferated in both early education and popular culture their effect having contributed substantially to the consciousness of the typical investor. Moreover, the dramatic expansion in popularity of graduate-level studies in finance over the last 30 years has created an especially well-informed subset of the population, now extending well into retirement. As a result, the arbitrary threshold established some 30 years ago and pushed higher by inflation has been more than offset by dramatic rise in proximate investor sophistication.
Given the above, it makes sense to look beyond income and wealth as individual accredited investor standards. The Commission can take some immediate steps to expand the pool of accredited investors without creating a drag on implementation and without impairing investor protection.
First, the existing financial thresholds should remain at present levels. The expansion in sophisticated financial literacy among investors has more than outpaced the rate of inflation.
Second, add a number of relevant professional credentials to the accredited investor qualification standards. These should include current: FINRA Series 7, 65, 66 and 82 license holders, CFA Charterholders, CFPs, CPAs and Bar-admitted attorneys.
Third, amend the rule that designates an entity as accredited so long as 100% of the equity owners are accredited. By requiring that only a majority of equity ownership is accredited, a side-by-side structure is encouraged where less-experienced, unaccredited investors could join with more experienced investors.
While it has been suggested that more complex criteria be considered like university-level coursework and professional experience, or that testing regimes be created, these processes would require lengthy implementation periods and significant infrastructure. With time and expense a consideration, these do not amount to a near-term solution.