Background Overlay

Focus on Funds
Newsletter

SEC Committee Calls for Revised “Accredited Investor” Definition

In October 2014, the SEC’s Investor Advisory Committee (IAC) recommended significant changes to the definition of “accredited investor” which are still pending. If adopted, these changes will have a big impact on private stock offerings.

 

Why It Matters

It’s been a year since the SEC issued final regulations lifting the 80-year-old ban on general solicitation and general advertising (GSGA) for private placements. Subject to certain restrictions, issuers may now use their websites, social media, and e-mail — as well as traditional print and broadcast print advertising — to promote stock offerings without the need for a registered public offering.

Although many issuers have taken the opportunity to reach a wider audience of potential investors, the use of GSGA hasn’t caught on as quickly as predicted. One reason for this is that sales pursuant to these offerings are limited to accredited investors. And issuers must take “reasonable steps” to prevent sales to non-accredited investors, including verification of purchasers’ net worth and income. This may be a burden on issuers and may deter potential investors who are hesitant to share their sensitive financial information.

Issuers still have the option of conducting private offerings without GSGA. This enables them to sell stock to an unlimited number of accredited investors plus up to 35 non-accredited investors who, either alone or with a purchaser representative, are considered “sophisticated.” Also, in offerings without GSGA, an issuer has less responsibility for verifying an accredited investor’s qualifications. Investors essentially “self-certify” by completing a questionnaire and demonstrating a pre-existing relationship with the issuer.

What’s Being Proposed

Under the current definition, individual investors are accredited if they have either:

     1. Net worth of at least $1 million (excluding their primary residence), or

     2. Income of at least $200,000 ($300,000 for married couples) in each of the preceding two years which is expected to continue in the current year..

People with this level of income or net worth are considered to be better equipped to make informed investment decisions and protect their own interests.

However, the IAC has stated that “the current definition [of “accredited”] is, at best, an imperfect proxy for financial sophistication and access to information.” Investors with high income or net worth aren’t necessarily sophisticated, and many highly sophisticated investors under the income thresholds are excluded. Plus, the definition doesn’t take into account the liquidity of a person’s net worth or the percentage of income or net worth being invested.

To address these deficiencies, the IAC recommends:

     • Revising the definition of accredited investor to allow individuals to qualify based on their financial sophistication measured by professional credentials, investment experience, or a standardized test, and

     • If income and net worth thresholds continue to be used, limiting investments to a percentage of income or assets.

The committee also suggests strengthening protections for non-accredited investors who are deemed sophisticated based on advice from a purchaser representative (such as prohibiting representatives from having a personal financial stake in an investment). And it urges the SEC to develop alternative means of verifying accredited status that eases the burden on issuers and avoids the need for investors to share sensitive financial information with issuers. One potential solution is to use independent third parties — such as brokers, investment advisers, accountants, or attorneys — to verify accredited investor status.

Expanding the Pool

Issuers should monitor the SEC’s deliberations over the IAC’s recommendations. The suggested changes are likely to improve investor protection while expanding the pool of capital available for private offerings.

PLEASE READ THESE TERMS AND CONDITIONS OF USE CAREFULLY. THIS IS A LEGAL CONTRACT.

Acceptance of Terms of Use

The Untracht Early LLC (UE) client portal is offered to you on the condition of your acceptance of the terms, conditions and notices contained herein. By using the portal you agree to these terms and conditions. If you are not a client or authorized employee of UE, any use by you of the portal is prohibited.

Description of Service

The portal provides UE’s clients with access to information displayed on the portal for inquiries and deliveries of documents and communications for their account only. The information, documents and communications on the portal are provided as a convenient resource to clients, their attorneys, agents and other designated representatives (collectively, “Agents”) and may be used for informational purposes only for their account. To the extent you wish to authorize any Agents to access your account, you must sign and return the form of Authorization set forth below.

User Password and Security

Using the portal and its related services requires the use of a password and a user name. The confidentiality of your password and account is your responsibility. Any activities that occur under your account either by you or your Agents are your responsibility. You agree to notify us immediately of any unauthorized use of your account or any other breach of security. It is prohibited to use anyone else’s account without the express permission of that account holder.

Accuracy of Content and Liability Disclaimer

UE will strive to use reasonable efforts to include accurate and updated information on the portal; HOWEVER, YOU UNDERSTAND AND AGREE THAT UE IS UNDER NO OBLIGATION TO DO SO AND NEITHER UE NOR ITS SUPPLIERS, AGENTS OR REPRESENTATIVES MAKE ANY REPRESENTATION OR WARRANTY ABOUT THE SUSTAINABILITY, RELIABILITY, AVAILABILITY, TIMELINESS, AND ACCURACY OF THE INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS CONTAINED ON THE PORTAL FOR ANY PURPOSE TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW. ALL SUCH INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS ARE PROVIDED “AS IS” WITHOUT WARRANTY OR CONDITION OF ANY KIND. UE, AND ITS SUPPLIERS, AGENTS AND REPRESENTATIVES HEREBY DISCLAIM ALL WARRANTIES AND CONDITIONS WITH REGARD TO SUCH INFORMATION, SOFTWARE, DOCUMENTS AND COMMUNICATIONS, INCLUDING WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT.

TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL UE, OR ITS SUPPLIERS, AGENTS OR REPRESENTATIVES BE LIABILE FOR ANY DIRECT, INDIRECT, PUNITIVE, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR ANY OTHER DAMAGES WHATSOEVER, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN ANY WAY CONNECTED WITH YOUR OR YOUR AGENTS’ USE OR THE PERFORMANCE OF THE PORTAL, WITH THE DELAY OR INABILITY TO USE THE PORTAL OR RELATED SERVICES, WHETHER BASED IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, EVEN IF UE OR ITS SUPPLIERS, AGENTS AND REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF DAMAGES. CERTAIN STATES DO NOT PERMIT TYPES OF THESE LIMITATIONS, SO THE ABOVE LIMITATIONS MAY NOT APPLY TO YOU. IF YOU ARE DISSATISFIED WITH ANY PORTION OF THE PORTAL INFORMATION, DOCUMENTS OR COMMUNICATIONS ON THE PORTAL, OR WITH ANY OF THESE TERMS AND CONDITIONS OF USE, YOUR SOLE AND EXCLUSIVE REMEDY IS TO CEASE USING THE PORTAL AND THE INFORMATION, DOCUMENTS OR COMMUNICATIONS YOU OBTAINED FROM THE PORTAL.

Icons, Logos and Other Proprietary Material

The trademarks, logos, and service marks (collectively the “Trademarks”) displayed on the portal are registered and common law trademarks of this firm. Nothing contained on the portal should be construed as granting, by implication, or otherwise, any license or right to use any of the Trademarks displayed on the portal without the written permission of this firm. Your use of any of the Trademarks displayed on the portal or displayed on any content on the portal is strictly prohibited. You should assume that everything you see or read on the portal is copyrighted and is a trade secret and may not be used except as provided in these terms and conditions of use or in the text on the portal without the written permission of this firm or its suppliers.

Changes to Terms and Conditions of Use

UE may at any time modify the terms, conditions and notices under which the portal is offered by updating this posting. You are bound to any such modifications and should therefore periodically visit this page to review the then-current terms and conditions to which you are bound.

Confidentiality, Information Protection, and Protection Data

Notwithstanding any existing legal or contractual obligations regarding confidentiality between you and UE, you undertake to treat all knowledge relating to business secrets, which come into your possession, as confidential. You shall assure that any protected data, which comes into your possession through the use of the portal, is not transmitted to any unauthorized person. In partial consideration of the opportunity to access the resources of the portal concerning your account, you agree to maintain the strict confidentiality of access of the portal and its data to you and your authorized Agents and to indemnify and hold harmless UE and its officers, shareholders and employees and their heirs, successors and assigns from and against any and all claims, actions, demands, losses, damages, judgments, costs and expenses, including without limitation, reasonable attorneys’ fees and liabilities of every kind which may arise from your or your employees’ or agents’ use of the portal or because of violation of these terms and conditions of use.

No Unlawful or Prohibited Use

You are prohibited from using the portal to damage, disable, or overburden UE’s servers or network or impair the portal or interfere with any other party’s use of the portal. Hacking, password mining or any other means to gain unauthorized access to the portal, portal accounts, computers or network is prohibited. Posting or transmitting any unlawful, threatening, libelous, defamatory, obscene, scandalous, inflammatory, pornographic, or profane material or any material that could constitute or encourage conduct that would be considered a criminal offense, give rise to a civil liability, or otherwise violate any law is also prohibited. UE will fully cooperate with any law enforcement authorities or court order requesting or directing this firm to disclose the identity of anyone posting any such information and materials. This firm is an equal opportunity employer and values the diversity of its people.

RELEASE AND INDEMNITY. IN AGREEING TO USE, AND BY USING, THE UNTRACHT EARLY PORTAL, YOU ALSO AGREE TO, AND HEREBY DO, RELEASE AND DISCHARGE UNTRACHT EARLY FROM ANY AND ALL CLAIMS OF EVERY NATURE AND DESCRIPTION ARISING OUT OF OR RELATING TO THE POSTING OF INFORMATION ON THE PORTAL, YOUR OR YOUR AGENTS’ USE OF THE PORTAL, AND/OR ANY BREACH OF SECURITY INVOLVING THE PORTAL. YOU HEREBY AGREE TO INDEMNIFY AND DEFEND UNTRACHT EARLY, ITS AGENTS, REPRESENTATIVES AND EMPLOYEES AGAINST ANY CLAIMS, DEMANDS, LAWSUITS AND OTHER PROCEEDINGS MADE ABOUT YOU, MADE BY THOSE IN PRIVITY WITH YOU OR MADE BY THOSE ACTING IN CONCERT WITH YOU, IN ANY WAY, WITH REFERENCE TO YOU OR YOUR INFORMATION OR BY ANY THIRD PARTIES ON YOUR BEHALF (INCLUDING AGENTS) RELATING IN ANY WAY TO THE UNTRACHT EARLY PORTAL.