Capital Formation, The SEC, and Accredited Investors

Protecting the investing public, while simultaneously facilitating the efficient flow of capital needed by all new and growing businesses continues as a primary responsibility of the U.S. Securities and Exchange Commission (SEC). Enhancing the capital formation process is a necessary step in the creation of jobs and growth of any economy. Central to the SEC’s regulatory schematic is the proposition that some particularly sophisticated and wealthy investors require less protection than those with less knowledge, experience, and resources. During December 2023, for just the third time, the SEC staff issued a report examining the status of the natural person accredited investor pool and whether the definition needs to be adjusted or modified. With arguments against making the definition either overinclusive or underinclusive, the SEC did not revise the wealth test for natural people to be accredited investors. This standard has not significantly changed since 1983, which has led to many more people qualifying as accredited investors, altering the SEC’s original intentions of the role of these accredited investors. Herein lies the central purpose of our inquiry. Exactly what criteria constitutes the optimal, appropriate definition for an “accredited investor”?