At a Congressional hearing last week, SEC Commissioner Elisse Walter made a number of comments about Rule 506 and the accredited investor definition.
Representative Dennis Heck asked Commissioner Walter if the SEC staff were currently reviewing the accredited investor definition, as permitted or called for under Dodd-Frank.
Walter noted some constraints imposed by Dodd-Frank - for example, the net worth standard, as changed by Dodd-Frank, was grandfathered for a period of time - but indicated that the SEC was, indeed, considering how the accredited investor definition might or should be changed.
Here's a transcript (apologies for any transcription errors) of what Commissioner Walter said to Rep. Heck at about the one hour, two minute mark in the archived webcast of the hearing:
“Some of the things we could consider, and I wouldn't rule out others, would be of course raising the numbers that are in the definition.
“Alternatively, we could use a different criterion. I tend to think that if we were to look at the amount an individual had invested, and we're really talking about natural person accredited investors here, we're not talking about entities, but if we were to look at a standard of a person having so much already invested, that prior experience, it wouldn't be perfect, but would be nonetheless an objective indicator that perhaps would be better.
“We could also look at criteria that are not specifically with respect to the definition. Borrowing from Title III of the JOBS Act, if you look at the crowdfunding provision, there is a provision in there that someone who is going to invest through a crowdfunding site has to go through a process of demonstrating that they understand basic concepts. Essentially an online, it would end up being an online learning module, where you would have to continue to keep going through until you got the answers right, so it would demonstrate a certain degree of knowledge. And we could perhaps consider something like that as well.”
It is the case that regulators, and state regulators in particular, have long pressed for increasing the income and net worth thresholds of the accredited investor definition, or otherwise tightening up and restricting the number of persons who can meet the definition. I think it's also fair to say that the lifting of the ban on general solicitation, and innovations pursuant to Title III of the JOBS Act, put additional pressure on the continuing viability of the current accredited investor definition.
Thanks to Doug Cornelius and Jim Hamilton for posts that flagged this aspect of Commissioner Walter's testimony.