The US Securities Exchange Commission (SEC) should review the definition of ‘accredited investor’ and raise the bar for those who want to want to invest in risky product, the Government Accountability Office (GAO) said in a report.
At present, an individual with net worth of US$1 million, excluding the value of a primary residence, or an individual annual income over US$200,000 is treated as an accredited investor.
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The GAO in its report said that adjusting the US$1 million minimum threshold to approximately US$2.3 million would decrease the number of households qualifying as accredited from approximately 8.5 million to 3.7 million.
The GAO said its obtained views on eight alternative criteria that focus on investors’ financial resources and their understanding of financial risk. Among the financial resources criteria, market participants identified a liquid investments requirement–a minimum dollar amount of investments in assets that can be sold, are marketable, and the value of which can be verified–as the most important for balancing investor protection and capital formation.
Among the understanding financial risk criteria, market participants most often identified the use of a registered investment adviser.
The report also suggested that SEC must review the accredited investor definition every four years to determine whether it should be adjusted, beginning in 2014.
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By GlobalDataSpecifically, SEC will have the views of market participants about how existing and alternative qualifying criteria could help determine an investor’s ability to bear and understand risks associated with unregistered securities offerings, the report says.
The SEC moved to exclude the home value in the net worth calculation in late 2011. The change was mandated by the Dodd-Frank law as a response to the 2007-2009 financial crisis, during which home values plunged.
However, the GAO report states that, even with this recent change, the definition does not reflect the current marketplace.
"The intended purposes of the accredited investor standard are to protect investors and streamline capital formation for small businesses," the GAO wrote.
