Division of Economic and 

Risk Analysis

U.S. Securities and Exchange Commission

February 19, 2016
The Commission, as a matter of policy, 

disclaims responsibility for any private 

publication or statement by any of its 

employees. The views expressed herein are 

those of the authors, and do not necessarily 

reflect the views of the Commission or of 

the authors’ colleagues on the staff of the 

Commission.
Accredited Investors

Mark J. Flannery

Director and Chief Economist
Accredited Investors

 Lengthy staff review of the definition of an “accredited 

investor” within U.S. securities markets

 December 18, 2015, available at SEC.GOV

 Pursuant to the 2010 Dodd-Frank Wall Street Reform and 

Consumer Protection Act
Background 

 The SEC operates with three main goals: 

 to protect investors;

 to maintain fair and orderly markets; and

 to encourage capital formation

 What level of disclosure – and how tightly pre-specified – is 

appropriate for the Commission’s charge to protect investors

 This depends on the sophistication of potential investors. One 

investor’s “protection” is another investor’s “exclusion from 

attractive market opportunities” 
 The SEC has long sought to reduce the fixed costs of issuing 

securities, to afford smaller companies better access to 

financial markets

 Since 1982, Regulation D does not specify information that 

needs to be furnished to investors if the issuer sells only to 

“accredited investors”

 Concept of an accredited investor:

 Some element(s) of financial sophistication

 Ability to bear losses

 Supreme Court (In S.E.C. v. Ralston Purina Co., 1953): can 

“fend for themselves” in the markets
Current Standard Current Standard 

Adjusted for Inflation 

(CPI)

Individual Income $200,000 $490,819 

Joint Income $300,000 $600,558 

Net Worth $1,000,000 $2,454,093 

 Later removed house value... 

Table 4.1: Inflation Adjustments
Standard Financial Threshold for 

Natural Persons

Regulatory Purpose

Qualified Client $1 million in assets under 

management; 

$2 million in net worth

Adviser may charge 

performance fees

Qualified Purchaser $5 million in investments Exemption from 

Investment Company Act 

registration for sales to 

qualified purchasers

Eligible Contract 

Participant 

$10 million in investments ($5 

million if hedging) 

Engage in certain 

derivatives and swaps 

transactions 

Sophisticated Investor 

(FTC) 

Initial investment > $1.08 

million

5 years’ experience and net

worth > $5.42 million

Franchising 
 Over time, inflation has increased the number/proportion of 

households that qualify as accredited investors

Basis for Qualifying as an 

Accredited Investor 

Percentage of Qualifying Households

In 1983 In 2013

Individual Income 0.5% 6.6% 

Net Worth 1.7% 7.5% 

Individual Income or Net 

worth 

1.8% 10.1% 

 Have investors gotten (that much) smarter?
Alternative indicators 

worth considering?

 Inflation adjustments? (Were the initial boundaries right, and 

do they remain so?)

 Ownership of sufficient “investments”

 Sufficient education

 Pass a test

 Have a degree or certificate? Series 7, CPA, CFA, CFP, etc. If 

you can sell it, should you be able to buy it? 

 Use of professional advisers 

 Affiliated persons (expand current set) 
Staff recommendations (p. 90)

 Leave $ limits in place, but limit size of permitted investments 

(as in Crowdfunding limits...)

 Inflation-adjusted limits, no limit on amount invested

 Permit qualification based on other criteria than income and 

net worth

 Minimum amount of investments

 Professional credentials

 Pass an “accredited investor” exam
What’s Next?

 The public can comment on the Report through the SEC’s 

website

 Policy actions? Congress? Other?

 Implications for capital raising and for investor protection