SEC’s Daniel Gallagher questions need to revise accredited-investor standard
Commissioner says that the private market is working just fine and that the effort to revise the accredited-investor standard is a waste of time.
As the Securities and Exchange Commission mulls whether to change the qualifications for who is eligible to buy unregistered securities, one of the agency’s members said Thursday it should drop the effort.
“This obsession with ‘protecting’ millionaires — potentially at the cost of hindering the wildly successful and critically important private markets — strains logic and reason,” said SEC member Daniel Gallagher Jr. “Millionaires can fend for themselves.”
The SEC is reviewing the accredited investor standard, which limits private placement purchases to individuals who earn at least $200,000 annually ($300,000 for a married couple) or have a net worth of $1 million, excluding their residence.
Under the Dodd-Frank financial reform law, the SEC must revisit the accredited-investor definition every four years. This is the first year the SEC has undertaken the task since the law was enacted in 2010.
Mr. Gallagher asserted that the SEC has better things to do.
“I have yet to be persuaded that this is an issue that we should be taking up at this time,” he said at the SEC Government-Business Forum on Small Business Capital Formation.
The accredited-investor standard is designed to keep small, unsophisticated retail investors who can’t withstand large losses out of the market for investments in startup companies and other risky ventures. About 12 million U.S. households, or 9.9% of the total, qualified as accredited investors in 2013, according to SEC statistics.
The SEC doesn’t need to shield rich people from the vicissitudes of private placements, Mr. Gallagher said.
The SEC Investor Advisory Committee came to a different conclusion last month, when it recommended that the SEC scrap the income and net-worth floors and instead consider a definition that takes into account an individual’s education, professional credentials and investment experience.
The panel, created by the Dodd-Frank law to represent retail investors before the SEC, criticized the income and net-worth thresholds as poor proxies for sophistication that leave investors vulnerable.
Participants in the SEC forum Thursday also wrestled with the question of whether raising the income and net worth thresholds would force so many investors out of the private-placement pool that it would hinder the ability of fledgling companies to raise capital.
A study by the SEC Division of Economic and Risk Analysis showed that if the accredited-investor standard was adjusted for inflation, only 3.5% of American households would qualify. If retirement assets also were excluded, only 3.1% would exceed the threshold. The standard was set in 1982 and hasn’t been revised significantly since.
“The question of what the standard should be for an accredited investor is unanswerable except as a political question,” Donald Langevoort, a professor at the Georgetown University Law Center, said at the SEC forum. “There is no analytical basis.”
Yet it’s a topic whose urgency is increasing following the SEC’s approval of a rule last year that allowed advertising to the general public about private placements. Sales are still limited to accredited investors.
“We keep struggling, and we haven’t gotten there yet,” A. Heath Abshure, Arkansas securities commissioner, said at the SEC forum. “The time has come. We’ve really got to do something.”
Unlike her commission colleague, SEC member Kara Stein is undecided about the direction the agency should take on the accredited investor definition.
“It’s hard for me to comment on this right now,” Ms. Stein said at the forum. “What I hear are the tensions. Everyone is talking about trade-offs.”
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