Accredited Investors: Marketing vs. Privacy
BY RICH WHITE
“Accredited investors” are about to become one of the biggest marketing battlefields in financial services. But the real question may be: Will the real accredited investors please stand up…or not?
A little background is helpful. Accredited investors currently are defined by Rule 501 based solely upon: 1) net worth or joint net worth, excluding the value of primary residence (and any related indebtedness); and 2) their annual incomes over the two most recent years and current year. The asset threshold is $1 million for all, and the income threshold is $200,000 for individuals and $300,000 for married couples.
Accredited investors qualify under the Rule 506 (Regulation D) exemption to participate in non-registered private placements. In the past, private placements were allowed to accept any number of accredited investors plus up to 35 non-accredited investors. That remains true today unless the offering takes advantage of a provision in the 2012 Jumpstart Our Business Startups (JOBS) Act, which now allows Rule 506 private placements to generally solicit (advertise to) anyone and everyone. However, if there is a general solicitation, every single purchaser of the securities must be accredited, without exception. The JOBS Act also tightened up requirements that issuers of Reg D offerings must meet to verify that all purchasers are accredited. For example, third-party professional confirmation is required to verify that a purchaser meets the assets test.
Now, to complicate the situation, the SEC has announced that it is conducting a review of the accredited investors requirements, which will include results of a Government Accountability Office (study) mandated by the Dodd-Frank Law, and due in July. The SEC has indicated it may consider increasing the income and assets thresholds, and also adding an ability to qualify through: 1) attainment of professional-level financial education; and/or 2) access to professional-level financial advice.
All of this comes as two other trends play out. First, more wealthy investors are concerned about privacy – specifically whether the government has access to information about their assets. Second, “liquid alternative” mutual funds and ETFs continue to proliferate, giving wealthy investors greater access to transparent, registered versions of investment strategies that once were available only through privately placed hedge funds.
So, what will happen? First, the GAO and SEC will speak – although this may take time. Meanwhile, Wall Street will throw a huge marketing party to attract accredited investors through general solicitation of private placements. However, many of those investors may opt to take a pass, rather than submit to intrusive confirmations of their wealth, conducted by or for securities issuers they may not know. Meanwhile, liquid alternative investments may continue to be the big winners.
For a recent analysis on the GAO/SEC evaluations by the accounting firm Rothstein Kass in PDF format, look here.