WEST PALM BEACH, Florida, May 23, 2016 /PRNewswire/ --
The first definition of accredited investor was established in 1982 and has not been comprehensively re-examined since. However, in 2011 the Dodd-Frank Act narrowed the definition to exclude an individual's primary residence from the net worth calculation.
In 2014 Forbes reported that the SEC was considering updating the standards used to determine accreditation. This consideration has since evolved into a genuine recommendation.
The SEC currently recommends a complete revision to the definition of accredited investor that includes the addition of investment limitations to the current income and net worth thresholds and the creation of higher thresholds that would not have investment limitations. Moreover, the SEC staff suggests indexing the thresholds for inflation.
All offers and sales of securities must either be registered with the SEC under the Securities Act of 1933 (the "Securities Act") or be subject to an available exemption to registration. The purpose of registration is to provide investors with full and fair disclosure, allowing them to make informed investment decisions.
When creating the registration and exemption requirements, Congress and the SEC recognized that not all investors needed the protection of public registration and not all situations possessed a practical need for formal registration. These exempt offerings merely require a rudimentary investor disclosure document, are not subject to ongoing federal reporting requirements, and their respective offering documents are not reviewed by the SEC. Due to these abbreviated standards, exempt offerings carry a much greater degree of risk and are intended for sophisticated, accredited investors.
Regulation D provides the most commonly used registration exemptions. Approximately $1.3 trillion was raised under Regulation D in 2014 alone. The definition of accredited investor provides the backbone to the Regulation D exemptions and is intended to protect unsophisticated and low-net-worth investors from participating in high-risk, technical offerings that possess an inherently greater probability of financial loss.
Qualifying as an accredited investor is the essential criterion that must be satisfied in order to participate in an exempt offering. Equally vital is the issuer's ability to confidently rely upon the rules that govern exemptions from registration as well as the corresponding definition that determines who is genuinely accredited.
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