The definition of an Accredited Investor will probably change this year. Currently, an Accredited Investor is someone who earns over $200,000 a year ($300,000 if married) or holds over $1 million in assets, not counting a primary residence. While certain adjustments have been made to open up the defintion in recent years, the current definition is an effective barrier to individuals looking to participate in a Reg D offering. Reg D is the exemption that most promising private firms utilize to raise growth capital before going public. As the cost to go public has risen dramatically, and the cost to be a public firm is ongoing, many private firms seek to remain private for as long as possible, thus disenfranchising the majority of the population.
As we all know, sophistication is not measured by a salary or net worth. Everyone acknowledges the shortcomings of the current definition, with the exception of certain policymakers who will do anything to save us from ourselves.
Various bills are queuing to update the definition. Below is a brief summary of the legislation that was presented last month at a House Financial Services Committee hearing.
- The Fair Investment Opportunities for Professional Experts Act:
- This bill allows brokers or investment advisors to be defined as Accredited by default. Also, any individual who has qualifying professional experience, as deemed by the SEC, will be Accredited. Adjustments to the net worth are included in the current language and the $1 million hurdle will be adjusted for inflation.
- The Accredited Investor Definition Review Act:
- An individual holding certain certifications, designations, or credentials that indicate financial sophistication will be deemed Accredited.
- The Equal Opportunity for All Investors Act of 2025:
- An Accredited Investor under Reg D would be someone certified through an examination. The SEC will determine the program.
- The Accredited Investors Include Individuals Receiving Advice from Certain Professionals Act:
- The definition of an accredited investor to include individuals receiving advice from certain investment professionals.
- The Accredited Investor Definition Reforms:
- Any individual who passes an Accredited Investor examination shall be deemed to be Accredited. The SEC will establish the exam. Individuals who have already passed the Securities Industry Essentials exam offered by FINRA, or a similar examination, are considered Accredited. Retirement funds will no longer be considered as part of the wealth metric under the existing rules. The net worth requirement will be adjusted for inflation going forward.
While it is unclear when the issue will be addressed, the definition will be changed (and should be changed). The current definition does not address the needs of the Reg D market while excluding individuals with sufficient financial acumen to determine if an investment holds merit. The popularity amongst members of establishing an exam appears to be in the lead. The final language could incorporate a combination of the various proposals.