SECURITIES AND 

EXCHANGE 

COMMISSION

Alternative Criteria 

for Qualifying As An 

Accredited Investor 

Should Be Considered

Report to Congressional Committees

July 2013

GAO-13-640

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-640, a report to 

Congressional Committees

July 2013

SECURITIES AND EXCHANGE COMMISSION

Alternative Criteria for Qualifying As an Accredited 

Investor Should Be Considered

Why GAO Did This Study

Accredited investors who meet certain 

income and net worth thresholds may 

participate in unregistered securities 

offerings. GAO determined that the 

intended purposes of the accredited 

investor standard are to (1) protect 

investors by allowing only those who

can withstand financial losses access 

to unregistered securities offerings and 

(2) streamline capital formation for 

small businesses. To qualify as 

accredited, SEC requires an investor to 

have an annual income over $200,000 

($300,000 for a married couple) or a 

net worth over $1 million, excluding a 

primary residence. The thresholds 

were set in the 1980s and 2010. The 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act mandates 

GAO to study the criteria for qualifying 

individual investors as accredited.

This report examines market 

participants’ views on (1) the existing 

criteria for accredited investor status 

and (2) alternative criteria. To address 

these objectives, GAO conducted a 

literature review, examined relevant 

data, and interviewed domestic and 

foreign regulators and industry 

representatives to identify alternative 

criteria. GAO also conducted 

structured interviews of 27 market 

participants (including broker-dealers,

investment advisers, attorneys, and 

accredited investors). 

What GAO Recommends

SEC should consider alternative 

criteria for the accredited investor 

standard. For example, participants 

with whom GAO spoke identified 

adding liquid investments and use of a 

registered adviser as alternative 

criteria. SEC agreed with GAO’s

recommendation. 

What GAO Found 

Of the existing criteria in the Securities and Exchange Commission’s (SEC) 

accredited investor standard, many market participants identified net worth as the 

most important criterion for balancing investor protection and capital formation.

For example, two market participants said the net worth criterion, more so than 

income, likely indicates the investors’ ability to accumulate wealth and their 

investment knowledge. Others noted that some parts of the market might not 

accept adjustments to the thresholds. For example, an association of angel 

investors—accredited investors who invest in start-up companies—told GAO that 

they would be resistant to increased thresholds because it would decrease the 

number of eligible investors. GAO analysis of federal data on household net 

worth showed that adjusting the $1 million minimum threshold to approximately

$2.3 million, to account for inflation, would decrease the number of households 

qualifying as accredited from approximately 8.5 million to 3.7 million. 

While citing net worth as the most important criterion, several market participants 

GAO interviewed said that alternative criteria related to an investor’s liquid 

investments and their use of an investment adviser also could balance investor 

protection and capital formation. GAO obtained views on eight alternative criteria 

that focus on investors’ financial resources and their understanding of financial 

risk—criteria that SEC or industry groups previously proposed or that foreign 

regulators use. Among the financial resources criteria, market participants with 

whom GAO spoke most often identified a liquid investments requirement—a 

minimum dollar amount of investments in assets that can be easily sold, are 

marketable, and the value of which can be verified—as the most important for 

balancing investor protection and capital formation. Among the understanding 

financial risk criteria, market participants most often identified the use of a 

registered investment adviser. Beginning in 2014, SEC must review the 

accredited investor definition every 4 years to determine whether it should be 

adjusted. This study provides a reasonable starting point for SEC’s review. 

Specifically, SEC will have the views of market participants about how existing 

and alternative qualifying criteria could help determine an investor’s ability to 

bear and understand risks associated with unregistered securities offerings. 

Market Participants’ Views on Which Alternative Criteria Best Balance Investor Protection and 

Capital Formation

View GAO-13-640. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov
Page i GAO-13-640 Accredited Investor

Letter 1 

Background 4

Net Worth Identified as Most Important Criterion for Qualifying 

as Accredited Investor 12

Market Participants Identified Alternative Criteria SEC Could Use 

in the Investor Standard 20

Conclusions 28

Recommendation for Executive Action 29

Agency Comments 29

Appendix I Objectives, Scope, and Methodology 31

Appendix II Summary of Rules for Exemption from Registration under 

Regulation D 37

Appendix III Summary of Results from Our Structured Interviews 38

Appendix IV Comments from the Securities and Exchange Commission 58

Appendix V GAO Contact and Staff Acknowledgments 59

Tables

Table 1: Number of Regulation D and Registered Public Offerings 

Filed, Fiscal Years 2009-2012 7

Table 2: Number of Households Eligible for Accredited Investor 

Status at Various Thresholds for Net Worth and Income, 

2010 18

Table 3: Estimates and Standard Errors for Number of Households 

by Various Income and Net worth Thresholds, 2010 34

Table 4: Summary of Requirements for Exemptions under Rules 

504-506 of SEC Regulation D, as of June 14, 2013 37

Table 5: Do You Believe the Current Qualification Criteria Should 

be Adjusted or Should Not Be Adjusted? 38

Contents 
Page ii GAO-13-640 Accredited Investor

Table 6: On a Scale of 1 to 5, Where 1 Is Not Important and 5 Is 

Extremely Important, How Important Are Financial 

Resources in Determining Accredited Investor Status? 38

Table 7: On a Scale of 1 to 5, Where 1 Is Not Important and 5 Is 

Extremely Important, How Important Is Understanding 

Financial Risk in Determining Accredited Investor Status? 39

Table 8: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Increasing the 

Minimum Annual Income Requirement? 39

Table 9: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Increasing the Minimum Annual Income 

Requirement? 39

Table 10: Would Increasing the Minimum Annual Income 

Requirement Strengthen, Weaken, or Have No Effect on 

Investor Protection? 40

Table 11: Would Increasing the Minimum Annual Income 

Requirement Promote, Limit, or Have No Effect on Capital 

Formation for Businesses? 40

Table 12: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Decreasing the 

Minimum Annual Income Requirement? 40

Table 13: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Decreasing the Minimum Annual Income 

Requirement? 41

Table 14: Would Decreasing the Minimum Annual Income 

Requirement Strengthen, Weaken, or Have No Effect on 

Investor Protection? 41

Table 15: Would Decreasing the Minimum Annual Income 

Requirement Promote, Limit, or Have No Effect on Capital 

Formation for Businesses? 41

Table 16: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Increasing the 

Minimum Net Worth Requirement? 42

Table 17: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Increasing the Minimum Net Worth Requirement? 42

Table 18: Would Increasing the Minimum Net Worth Requirement 

Strengthen, Weaken, or Have No Effect on Investor 

Protection? 42
Page iii GAO-13-640 Accredited Investor

Table 19: Would Increasing the Minimum Net Worth Requirement 

Promote, Limit, or Have No Effect on Capital Formation 

for Businesses? 43

Table 20: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Decreasing the 

Minimum Net Worth Requirement? 43

Table 21: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Decreasing the Minimum Net Worth Requirement? 43

Table 22: Would Decreasing the Minimum Net Worth Requirement 

Strengthen, Weaken, or Have No Effect on Investor 

Protection? 44

Table 23: Would Decreasing the Minimum Net Worth Requirement 

Promote, Limit, or Have No Effect on Capital Formation 

for Businesses? 44

Table 24: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Replacing the 

Current Standard with a Liquid Investment Requirement? 44

Table 25: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Replacing the Current Standard with a Liquid 

Investment Requirement? 45

Table 26: Would Replacing the Current Standard with a Liquid 

Investment Requirement Strengthen, Weaken, or Have No 

Effect on Investor Protection? 45

Table 27: Would Replacing the Current Standard with a Liquid 

Investment Requirement Promote, Limit, or Have No 

Effect on Capital Formation for Businesses? 45

Table 28: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Is Replacing the 

Current Standard with a Fixed-Percentage Investment? 46

Table 29: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Replacing the Current Standard with a FixedPercentage Investment? 46

Table 30: Would Replacing the Current Standard with a FixedPercentage Investment Strengthen, Weaken, or Have No 

Effect on Investor Protection? 46

Table 31: Would Replacing the Current Standard with a FixedPercentage Investment Promote, Limit, or Have No Effect 

on Capital Formation for Businesses? 47
Page iv GAO-13-640 Accredited Investor

Table 32: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Would It Be to Add a 

Licenses or Certification Standard to the Current 

Standard? 47

Table 33: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding Licenses or Certification to the Current 

Standard? 47

Table 34: Would Adding a Licenses or Certification Standard to the 

Current Standard Strengthen, Weaken, or Have no Effect 

on Investor Protection? 48

Table 35: Would Adding a Licenses or Certification Standard to the 

Current Standard Promote, Limit, or Have No Effect on 

Capital Formation for Businesses? 48

Table 36: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Would It Be to Add an 

Investor Sophistication Test to the Current Standard? 48

Table 37: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding an Investor Sophistication Test to the 

Current Standard? 49

Table 38: Would Adding an Investor Sophistication Test to the 

Current Standard Strengthen, Weaken, or Have No Effect 

on Investor Protection? 49

Table 39: Would Adding an Investor Sophistication Test to the 

Current Standard Promote, Limit, or Have No Effect on 

Capital Formation for Businesses? 49

Table 40: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Would It Be to Add a 

Self-Certified Sophisticated Investor Designation to the 

Current Standard? 50

Table 41: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding a Self-Certified Sophisticated Investor 

Designation to the Current Standard? 50

Table 42: Would Adding a Self-Certified Sophisticated Investor 

Designation to the Current Standard Strengthen, Weaken, 

or Have No Effect on Investor Protection? 50

Table 43: Would Adding a Self-Certified Sophisticated Investor 

Designation to the Current Standard Promote, Limit, or 

Have No Effect on Capital Formation for Businesses? 51
Page v GAO-13-640 Accredited Investor

Table 44: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Would It Be to Add an 

Education Standard to the Current Standard? 51

Table 45: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding an Education Standard to the Current 

Standard? 51

Table 46: Would Adding an Education Standard to the Current 

Standard Strengthen, Weaken, or Have No Effect on 

Investor Protection? 52

Table 47: Would Adding an Education Standard to the Current 

Standard Promote, Limit, or Have No Effect on Capital 

Formation for Businesses? 52

Table 48: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is 

Extremely Feasible, How Feasible Would It Be to Add an 

Opt-in Provision to the Current Standard? 52

Table 49: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding an Opt-in Provision to the Current 

Standard? 53

Table 50: Would Adding an Opt-in Provision to the Current 

Standard Strengthen, Weaken, or Have No Effect on 

Investor Protection? 53

Table 51: Would Adding an Opt-in Provision to the Current 

Standard Promote, Limit, or Have No Effect on Capital 

Formation for Businesses? 53

Table 52: This Proposal Would Be a Requirement in Which an 

Individual’s Investments are Managed by a Registered 

Adviser. On a Scale of 1 to 5, where 1 Is Not Feasible and 5 

Is Extremely Feasible, How Feasible Would It Be to Add 

This Requirement to the Current Standard As an 

Alternative to the Current Standard? 54

Table 53: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is 

Extremely Likely, How Likely Is It That the Market Would 

Accept Adding This Requirement to the Current Standard? 54

Table 54: Would Adding This Requirement to the Current Standard 

Strengthen, Weaken, or Have No Effect on Investor 

Protection? 54

Table 55: Would Adding this Requirement to the Current Standard 

Promote, Limit, or Have No Effect on Capital Formation 

for Businesses? 55
Page vi GAO-13-640 Accredited Investor

Table 56: Which of the Financial Resource Criteria (Income, Net 

Worth, Investments in Securities, or Fixed-Percentage 

Investment) Is Most Important for Balancing Investor 

Protection and Capital Formation? 55

Table 57: Assuming the Current Standard Remains the Same, 

Should Liquid Investment Requirement or FixedPercentage Be Considered as Additions to The Current 

Standard? 55

Table 58: Which of the Understanding Financial Risk Criteria 

(Licenses/Certification, Investor Sophistication Test, SelfCertification, Education, Opt-in Provision, Investments 

Managed by a Registered Adviser) Best Balance Investor 

Protection and Capital Formation? 56

Table 59: Should Any of the Understanding Financial Risk Criteria 

(licenses/Certification, Investor Sophistication Test, SelfCertification, Education, Opt-in Provision, Investments 

Managed By a Registered Adviser) Be Considered as 

Replacements to the Current Standard? 56

Table 60: SEC Currently Prohibits General Solicitation and 

Advertising to Investors. But under the JOBS Act, SEC Will 

Lift the Prohibition Once a Final Rule Is in Place. Would 

Lifting the Prohibition Strengthen, Weaken, or Have No 

Effect on Investor Protection? 56

Table 61: Would Lifting the Prohibition Promote, Limit, or Have no 

Effect on Capital Formation? 57

Figures

Figure 1: Net Worth and Income Standards for Individual 

Accredited Investors, as of July 2013 6

Figure 2: History of the Accredited Investor Standard for 

Individuals, 1933-2011 9

Figure 3: Market Participants’ Opinions on How Existing Criteria 

Would Affect Investor Protection, as of February-March 

2013 15

Figure 4: Market Participants’ Opinions on How Existing Criteria 

Would Affect Capital Formation, as of February-March 

2013 16

Figure 5: Market Participants’ Views on Which Alternative 

Criterion Was Important for Balancing Investor Protection 

and Capital Formation, as of February 2013-March 2013 21
Page vii GAO-13-640 Accredited Investor

Figure 6: Market Participants’ Opinions on Replacing the Current 

Standard with Alternative Criteria for Financial 

Resources, as of February-March 2013 23

Figure 7: Market Participants’ Opinions on the Impact of Adding 

Criteria for Understanding Financial Risk, as of FebruaryMarch 2013 24

Abbreviations

AAII American Association of Individual Investors

ACA Angel Capital Association

IAA Investment Adviser Association

JOBS Act Jumpstart Our Business Startups Act 

NASAA North America Securities Administrators Association

PIPE Private Investment in Public Equity

SCF Survey of Consumer Finances

SEC Securities and Exchange Commission

NVCA National Venture Capital Association

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-13-640 Accredited Investor

441 G St. N.W.

Washington, DC 20548

July 18, 2013

The Honorable Tim Johnson

Chairman

The Honorable Michael Crapo

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Jeb Hensarling

Chairman

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

Small businesses rely on capital to start and expand their businesses. 

Some small businesses often satisfy capital needs by asking friends and 

family members, or by seeking bank loans. Small businesses (like startup companies) that exceed these resources, or have additional capital 

needs, may seek to sell shares of ownership or securities convertible into 

shares of ownership in the business to raise needed cash to be used in 

operations. Businesses and public companies can seek capital through 

public offerings or nonpublic offerings (private placements).

The Securities Act of 1933 (Securities Act) requires companies that are 

publicly offering securities for investment to register the offering of the 

securities with the Securities and Exchange Commission (SEC) and 

provide investors with all material information necessary to make an 

investment decision.1 The Securities Act contains exemptions from 

registration and authorizes SEC to provide, by rule, additional 

exemptions.

In particular, Rule 506 under SEC Regulation D exempts offerings from 

registration if the issuer conducts a limited offering and restricts sales to 

accredited investors and up to 35 nonaccredited investors. Within 

Regulation D, SEC sought to facilitate capital formation while protecting 

 

1

17 C.F.R. 230.408.

 
 

Page 2 GAO-13-640 Accredited Investor

investors—consistent with its mission to protect investors; maintain fair, 

orderly, and efficient markets; and facilitate capital. While Regulation D 

originated as an effort to assist small businesses with capital formation, 

various types of companies rely on registration exemptions in Regulation 

D. According to SEC staff, in 2011, the estimated amount of capital raised 

in these types of exempt offerings was just over $1 trillion, which is 

comparable to the amount of capital raised in registered offerings in that 

year. Further, pooled investment vehicles (hedge fund, private equity, 

venture capital, and other investment funds) are among the top issuers 

under Regulation D, accounting for 29 percent of such offerings in 2011.2

Under Regulation D, SEC defines individual accredited investors as 

meeting certain income and net worth thresholds.3 Based on information 

we reviewed, this type of investor is generally a securities purchaser who 

possesses knowledge and experience in finance and business matters to 

evaluate the risks and merits of prospective investments or one who the 

issuer reasonably believes meets this description.4 On the basis of the 

legislative history of the accredited standard, SEC’s mission statement, 

and academic literature, we determined that the intended purposes of the 

accredited investor standard are to protect investors (by allowing only 

those who can withstand financial losses to have access to private 

placements) and streamline capital formation for small businesses. SEC’s 

thresholds for individual accredited investors were established in the 

1980s. The thresholds for income and net worth were intended as a 

buffer to protect the investor from potential economic loss of investing in 

private placements. Section 415 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act) requires us to study 

appropriate criteria for qualifying as an accredited investor.

This report examines market participants’ views on (1) the existing criteria 

for qualifying for accredited investor status, and (2) alternative financial 

 

2

Vlad Ivanov and Scott Bauguess, Capital Raising in the U.S.: The Significance of 

Unregistered Offerings Using the Regulation D Exemption, report prepared for SEC, 

Division of Risk Strategy and Financial Innovation (Washington, D.C.: Feb. 2012). 

3

The focus of this report is on individual accredited investors and not the institutional or 

non-natural person accredited investor. As a result, in this report we refer to natural 

person accredited investor as “accredited investor.” 

4

As will be discussed later in this report, SEC does not track the number of accredited 

investors and the total population of this type of investor is unknown.
 

Page 3 GAO-13-640 Accredited Investor

and other qualification criteria. To address these objectives, we reviewed 

SEC’s current definition of and legislative history for the accredited 

investor standard. We also reviewed SEC’s proposed changes to the 

accredited investor standard since 2006, market participants’ comment 

letters to SEC on these proposals, academic literature related to 

accredited investors and unregistered securities offerings, and applicable 

criteria used by foreign regulators. To estimate the impact of changing the 

minimum net worth and income thresholds on eligible households, we 

analyzed data from the Survey of Consumer Finances (SCF) issued by 

the Board of Governors of the Federal Reserve System (Federal 

Reserve). We found the Federal Reserve data to be sufficiently reliable to 

evaluate household income and net worth levels. We interviewed staff 

from SEC and other federal financial regulators, lawyers knowledgeable 

about accredited investor issues, and trade associations to discuss 

current and alternative criteria for accredited investor status. In addition, 

we interviewed officials from the Ontario (Canada) Securities Commission 

and United Kingdom Financial Services Authority about their investor 

standards, and others with standards similar to the U.S. accredited 

investor standard.

Compiling information from SEC’s proposed changes, academic 

literature, and criteria used by foreign regulators, we identified eight 

alternative criteria. We grouped these criteria under two categories—

financial resources and understanding financial risk. To obtain the views 

of market participants on existing and alternative criteria, we conducted 

structured interviews with a judgmental sample of 27 market participants, 

whom we categorized in four groups of different segments of the 

accredited investor population: (1) attorneys who have experience in 

private placement transactions, (2) accredited investors who invest in 

private placements, (3) retail investors who meet the current accredited 

investor criteria but do not necessarily invest in private placements, and 

(4) broker-dealers and investment advisers who work with accredited 

investors. The results from the structured interviews are not generalizable 

to the population of market participants and only represent the opinions of 

these 27 individuals. See appendix I for additional information on our 

scope and methodology.

We conducted this performance audit from June 2012 to July 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 
 

Page 4 GAO-13-640 Accredited Investor

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Small businesses, such as startup companies, may choose to raise 

capital through a nonpublic offering, also called a private placement, 

when their capital needs exceed what might be available through other 

channels (such as bank loans, personal credit cards, or loans from friends 

and family).5 Public companies also may raise capital using private 

placements to benefit from lowered transaction costs and raise funds 

more quickly than in the public market.6

Private placements generally involve issuers, placement agents or 

finders, qualifying accredited investors, and regulators.

• Issuers. Issuers include private and public companies, and pooled 

investment vehicles such as hedge, venture capital, or private equity 

funds.7

• Placement agent or finders. Issuers may employ placement agents 

(who are registered with SEC, the Financial Industry Regulatory 

Authority, or states) and finders (who are unregistered with regulators) 

to access accredited or other qualified investors.8

• Qualifying accredited investors. Qualifying accredited investors can 

be individuals or institutions. Some individual accredited investors, 

called angel investors, invest in early-stage start-up companies with 

high growth potential. Other qualifying accredited investors, such as 

venture capital funds that invest in start-ups at later stages of 

development, are institutional accredited investors.

 

5

We use the term “start-up companies” to refer to small businesses with a scalable 

business model. In interviews we conducted, market participants told us that start-up 

companies generally connote businesses with high growth potential. 

6

Using Private Investment in Public Equity (PIPE) transactions, public companies sell 

securities to a limited group of accredited investors in a private transaction and file a 

registration statement to provide for resale by those investors into public markets. 

7

Pooled investment vehicles accumulate capital from third parties, including individuals 

and institutional entities such as endowment or pension funds that frequently qualify as 

accredited investors, and make investments on the third parties’ behalf.

8

Qualified purchasers and qualified clients are separate categories of investors in some 

types of private placements of pooled investment vehicles under the Investment Company 

Act of 1940 and the Investment Advisers Act of 1940, respectively. The qualifying criteria 

for such investors differ from those for accredited investors. 

Background 
 

Page 5 GAO-13-640 Accredited Investor

• Regulators. SEC and state regulators have some oversight over the 

offering and sale of private placement securities. SEC generally limits 

its enforcement activity to fraud and does not conduct reviews of 

offering materials or verify accredited investor status.9 State regulators 

play a role in investigating potential fraud in private placements and 

enforcement after the securities have been sold in their state for 

certain exempted securities. 

Regulation D defines accredited investors and describes certain terms 

and conditions of offers and sales of private placements securities.10

Under Regulation D, accredited investors consist of institutional entities 

and individuals. Institutions that qualify as accredited investors include 

certain regulated financial institutions and certain entities with total assets 

of $5 million or more.11 Individuals who qualify as accredited investors are 

directors, executive officers, and general partners of the securities 

issuers, or persons who have a minimum annual income in excess of 

$200,000 ($300,000 with spouse) or net worth in excess of $1 million 

excluding primary residence (see fig. 1). The focus of this report is on 

individual accredited investors.

 

9

SEC officials said that for Regulation D, if the issuer did not comply with applicable 

securities laws, generally investors would have a right of rescission on their investments, 

which provides an incentive to issuers for ensuring their investors meet the accredited 

investor standard.

10See appendix II for more information on requirements for exemption under Regulation D 

rules. 

11Regulated financial institutions include banks, savings and loan institutions, registered 

brokers and dealers, insurance companies, registered investment companies, and Small 

Business Investment Companies. Qualifying entities with more than $5,000,000 in assets 

include certain benefit plans, 501(c) (3) organizations, corporations, and trusts not formed 

for the purpose of acquiring the offered securities whose purchase is directed by a 

sophisticated person. 

Regulation D
 

Page 6 GAO-13-640 Accredited Investor

Figure 1: Net Worth and Income Standards for Individual Accredited Investors, as of 

July 2013

Regulation D establishes registration exemptions, with the exemptions 

differing in the size of offerings, the number and type of investors, or both. 

These exemptions are described in Rules 504, 505, 506. 

• Under Rule 504, the maximum dollar amount of the offering is $1 

million in any 12-month period and no limit is set on the number of 

investors.

• Under Rule 505, the maximum offering is $5 million in any 12-month 

period and unlimited number of accredited investors and up to 35 

nonaccredited investors may invest.

• Under Rule 506, there are no offering dollar limits and an unlimited 

number of accredited investors and up to 35 nonaccredited 

sophisticated investors may invest.

Offerings made in reliance on the rules cannot solicit investors through 

any form of general solicitation or general advertising.12 SEC staff has 

indicated that an issuer would not contravene the prohibition against 

general solicitation if the issuer had a preexisting and substantive 

 

12On July 10, 2013, the SEC adopted a final rule permitting issuers using Rule 506 to 

utilize general solicitation and advertising when all the purchasers are accredited 

investors. The prohibition on general solicitation and advertising remains in effect for Rule 

504 and 505 offerings, and Rule 506 offerings with purchasers who are not accredited 

investors. 
 

Page 7 GAO-13-640 Accredited Investor

relationship with the investor.13 Of the three rules, Rule 506 is the most 

widely used exemption because there is no limit on the size of the offering 

or the number of accredited investors.14 Further, according to a GAO 

report, complying with state securities registration requirements for other 

exemptions may play a role as to why issuers rely more on Regulation 

D.15

SEC data show that businesses make more Regulation D offerings than 

registered public offerings (see table 1).16 Regulation D is designed to (1) 

eliminate any unnecessary restrictions SEC rules place on small business 

issuers, and (2) achieve uniformity between state and federal exemptions 

to facilitate capital formation consistent with investor protection.17

Table 1: Number of Regulation D and Registered Public Offerings Filed, Fiscal 

Years 2009-2012

Type of securities offering 2009 2010 2011 2012

Regulation D 17,887 17,178 18,203 18,107

Registered public offering 5,855 6,486 6,347 5,803

Source: SEC data.

Notes: Data for Regulation D offerings include new SEC Form D filings, and not amendments. 

Regulation D data include notices for exemptions under Rules 504, 505, and 506. Regulation D data 

for 2009 are based on the number of paper filings received and data for 2010 onward are based on 

electronic Form D filings. Registered public offerings include all original registration statements filed 

by issuers on Forms F-1, F-3, F-4, F-7, F-8, F-10, F-80, S-1, S-3, S-4, S-6, S-8, S-11, S-20, N-1A, N2, N-3, N-4, N-5, N-6, and N-14, and not amendments. The F-series registration forms are available 

only to foreign private issuers, the S-series registration forms generally are available to domestic 

issuers, and the N-series registration forms are available to investment companies.

 

13Rule 504 allows issuers to use a general solicitation under certain circumstances, 

including when offers and sales are registered in states that require the filing of a 

substantive disclosure document or if the state permits general solicitation and advertising 

only to accredited investors. 

14SEC analysis of information extracted from all electronic Form D filings from January 

2010 – March 2011 illustrates the dominant use of Rule 506 (in comparison with Rules 

504 and 505). For the three rules, approximately 55 percent of issuers filed under 506, 

and approximately 21 percent and approximately 18 percent, respectively, filed under 504 

and 505. See Vlad Ivanov and Scott Bauguess, Capital Raising in the U.S.: The 

Significance of Unregistered Offerings Using the Regulation D Exemption, report prepared 

for SEC, Division of Risk Strategy and Financial Innovation. 

15GAO, Securities Regulation: Factors That May Affect Trends in Regulation A Offerings, 

GAO-12-839 (Washington, D.C.: July 3, 2012).

16Ivanov and Bauguess, “Capital Raising in the U.S.” 

17GAO-12-839. 
 

Page 8 GAO-13-640 Accredited Investor

The accredited investor standard, which is used to adjust exemptive 

conditions under Regulation D, has undergone several changes since its 

adoption in 1982. As shown in figure 2, the qualifications for investment in 

private placements securities went through several interpretations and 

changes. For example, in 1953 the Supreme Court ruled that the 

applicability of registration exemptions depended on whether the 

purchasers of securities could “fend for themselves.”18 In 1974, SEC 

adopted Rule 146, a predecessor to Rule 506, which stated that investors 

were financially sophisticated enough to be offered or purchase private 

placement securities based on their knowledge and experience, capability 

of evaluating the risk and merits, and ability to bear the economic risk of 

investment.19 In 1982, Regulation D—the goals of which included 

facilitating capital formation and promoting investor protection—replaced 

previous rules, including Rule 146. The income and net worth thresholds 

established in Regulation D were intended to serve as proxies for 

financial experience, sophistication, and adequate bargaining power.20

Since 1982, SEC twice revised the individual accredited investor 

standard: it added the $300,000 threshold for joint income in 1988, and 

excluded the value of primary residence as part of the net worth 

calculation in 2011 as required by the Dodd-Frank Act.21

 

18SEC v. Ralston Purina Co., 346 U.S. 119 (1953).

19For this determination, important considerations were whether the investor could afford 

to hold unregistered securities for an indefinite period of time and whether at the time of 

the investment the investor could afford a complete loss. Additionally, the issuer should 

have reasonably believed that the investor, in combination with any representative, had 

the knowledge and experience in financial and business matters and that he or she was 

capable of utilizing information the rule requires to be provided to the investor to evaluate 

risks of the investment. Part 230 – General Rules and Regulations, Securities Act of 1933; 

Transactions by an Issuer Deemed Not to Involve Any Public Offering, 39 Fed. Reg. 

15261 (May 2, 1974). Transactions by an Issuer Deemed Not to Involve Any Public 

Offerings: Revision of Proposal, 38 Fed. Reg. 28951, 28954 (Oct. 18, 1973).

20Proposed Revision of Certain Exemptions from the Registration Provisions of the 

Securities Act of 1933 For Transactions Involving Limited Offers and Sales, 46 Fed. Reg. 

41791 (Aug. 18, 1981). 

21Regulation D Revisions, 53 Fed. Reg. 7866 (Mar. 10, 1988). Net Worth Standard for 

Accredited Investors, 76 Fed. Reg. 81793 (Dec. 29, 2011). 

Past, Recent, and 

Proposed Changes to the 

Accredited Investor 

Standard and Regulation D
 

Page 9 GAO-13-640 Accredited Investor

Figure 2: History of the Accredited Investor Standard for Individuals, 1933-2011

In recent years, market participants and a regulator have proposed 

several changes to the accredited investor standard for individuals. The 

proposals were generally based on concerns for investor protection and 

capital formation, and consist of adjustments to income and net worth and 

alternative ways of measuring investor knowledge. For instance, two 

consumer advocacy groups, an investment company association, SEC, 

and North American Securities Administrators Association (NASAA) have 

expressed concerns that the number of those eligible to be accredited 

investors has grown significantly since the thresholds were established. 

According to SEC, when the standard was first created, 1.87 percent of 

households qualified as accredited investors. SEC staff estimate that 9.04 

percent of households would have qualified as accredited investors under 

the net worth standard in 2007; we estimate that removing the primary 

residence from households’ net worth, as required in the Dodd-Frank Act, 
 

Page 10 GAO-13-640 Accredited Investor

dropped the percentage to 7.2 percent (based on 2010 data).22 SEC and 

NASAA say that because private placement offerings are generally 

illiquid, complex, and not reviewed by state or federal regulators, the risks 

of investing in private placement offerings are high and a higher level of 

protection may be necessary to protect accredited investors. In contrast, 

the angel investor community has expressed concerns about how any 

proposed changes could affect capital formation for start-up companies. 

Noting concerns about investor protection, SEC proposed several 

changes to Regulation D during the 2000s. In December 2006, SEC 

proposed a new standard for individuals with the goal of providing 

additional protection to accredited investors investing in certain pooled 

investment funds, including hedge funds. An investor would have to meet 

either the existing income or net worth criteria and also own at least $2.5 

million in investments at the time of the purchase of the securities. SEC 

stated that with this proposal, it sought to ascertain that an individual 

likely would have sufficient knowledge and experience to evaluate the 

merit and risk of certain private placement investments or be able to hire 

someone able to do so. In their comment letters on this proposal, some 

market participants suggested that SEC adjust the income and net worth 

standards for inflation, while others suggested these standards be 

lowered or eliminated. Some commentators suggested that SEC use a 

percentage of the net worth standard for certain investments. Others 

agreed with the proposal but made suggestions such as decreasing the 

required investments owned. This proposal was never finalized because, 

according to SEC officials, it received competing demands and mixed 

comments during the comment period.

In July 2007, SEC proposed other changes to align its rules with modern 

market practices and communications technologies without compromising 

investor protection. First, SEC proposed to create a new exemption for 

offers and sales for a new category of investors to be designated as 

“large accredited investors.” Under this standard, individuals would have 

to own $2.5 million in investments or have an annual income of $400,000 

(or $600,000 for married couples). Second, SEC proposed an alternative

 

22Based on 2010 data, we estimate that 5.2 and 2.8 percent of households would have 

qualified under the existing income threshold (individual and couple, respectively). We 

used 2010 year-end data from the Federal Reserve’s Survey of Consumer Finances, the 

latest data available, and SEC staff used 2007 data because they were the latest data 

available.
 

Page 11 GAO-13-640 Accredited Investor

criterion for the accredited investor standard (to include $750,000 of 

investments owned) and adjusting the dollar-amount thresholds for 

investments owned, income, and net worth to reflect future inflation. 

According to SEC, it did not finalize its proposals due to, as stated before, 

competing demands and the mixed comments it received during the 

comment period.23

There are pending changes to Regulation D as a result of the passage of 

the Dodd-Frank Act and the Jumpstart Our Business Startups Act (JOBS 

Act).

• First, Section 926 of the Dodd-Frank Act directs SEC to adopt a rule 

that would make the Rule 506 exemption unavailable to securities 

offerings in which “felons or other bad actors” were involved. SEC 

proposed a rule in 2011 defining bad actors and prohibiting them from 

using the Rule 506 exemptions if they have been convicted of, or are 

subject to court or administrative sanctions for securities fraud or 

other violations of specific laws.24 The SEC commission adopted the 

final rule in July 2013 which prohibits bad actors, which include the 

issuer, certain issuer, officers, significant owners, general partners or 

managing members of the issuer, whose actions occurred after the 

rule’s effective date from using Rule 506.25 Actions which occurred 

before the effective date must be disclosed but do not act as a 

prohibition against using Rule 506. 

• Second, the Dodd-Frank Act also requires SEC to review the 

“accredited investor” definition in its entirety beginning in 2014 and 

every 4 years thereafter and to conduct rulemaking as SEC deems 

appropriate after each review. As a result, criteria within the standard 

could change. According to SEC officials, they are conducting their 

review of the entire definition in 2014, after we publish our report on 

 

23On July 10, 2013, the SEC released a proposed rule which, in part, requested 

comments regarding the definition of accredited investor including on whether the net 

worth and income tests are the appropriate tests, whether the current financial thresholds 

are appropriate or should be indexed to inflation, and whether the thresholds should be 

tied to something other than a fixed dollar amount. The SEC did not include proposed 

language changes to the definition. 

24SEC proposed similar amendments in 2007 but, according to SEC officials, it did not 

take final action on that proposal because of competing demands and the mixed 

comments it received during the comment period.

25The final rule was adopted by the commissioners on July 10, 2013 and takes effect 60 

days after publication in the Federal Register. 
 

Page 12 GAO-13-640 Accredited Investor

market participants’ views relating to existing and alternative criteria 

for qualifying as accredited.

• Third, the JOBS Act directs SEC to implement a rule that would permit 

companies to use general solicitation and advertising to offer 

securities under Rule 506 of Regulation D. In August 2012, SEC 

proposed a rule permitting companies to advertise and market such 

securities offerings provided that the issuer takes reasonable steps to 

verify the purchaser’s accredited investor status. Currently, Rule 506 

does not specifically require that the issuer verify that accredited 

investors meet the requirements. The comment period to the 

proposed rule closed in October 2012. On July 10, 2013, the SEC 

adopted the final rule which permits issuers using Rule 506 to utilize 

general solicitation and advertising when all the purchasers are 

accredited investors.

26

Among existing criteria, market participants whom we interviewed said a 

net worth criterion was most important for balancing the goals of 

protecting investors and facilitating capital formation.27 While market 

participants offered varying viewpoints on how adjusting the existing 

thresholds for net worth and income would impact investor protection, 

they tended to agree on how adjustments would impact capital formation. 

In particular, many argued that increasing the thresholds would limit 

capital formation. Our analysis of Federal Reserve consumer finance data 

indicates that increasing the existing thresholds would contribute to 

limiting the pool of the eligible investors. Market participants said 

 

26The final rule is effective 60 days after the rule is published in the Federal Register. As 

of July 11, 2013, it has not been published in the Federal Register. Additionally, on July 

10, 2013, the SEC proposed a rule which would mandate additional requirements of 

issuers using the new general solicitation and advertising provisions, including requiring 

those issuers to file certain mandatory paperwork before the issuer engages in the general 

solicitation, requiring written general solicitation materials used in the new offering type to 

include certain disclosures, and imposing temporary submission requirements for general 

solicitation materials. 

27We conducted structured interviews with a judgmental sample of 27 market participants 

that we selected with assistance from their industry associations’ leadership and their 

peers. The results from the structured interviews are not generalizable to the population of 

market participants and only represent the opinions of these 27 individuals. We compared 

response patterns between the four types of market participants that we interviewed and 

found that generally, there were little differences in those patterns. By response pattern 

we mean the variability in response options chosen. See appendix I for additional 

information on our scope and methodology and appendix III for structured interview 

results.

Net Worth Identified 

as Most Important 

Criterion for 

Qualifying as 

Accredited Investor
 

Page 13 GAO-13-640 Accredited Investor

adjusting the existing net worth and income criteria is feasible, but market 

acceptance would depend on the extent of the adjustments.28

Seventeen of 27 market participants said that net worth was the most 

important criterion for balancing investor protection and capital 

formation.29 Nine of the 17 market participants said that net worth alone 

was the key criterion for balancing investor protection and capital 

formation. The other 8 participants stated that net worth with other criteria 

was important to balance investor protection and capital formation. Two 

market participants told us that net worth demonstrated an investor’s 

ability to accumulate wealth over time. One market participant also 

thought it indicated an investor’s understanding of financial risk and 

having experience with investment decisions. A few market participants 

and an industry expert said that a high net worth provided a cushion 

against risky investments—that is, having enough assets to bear the loss 

of the investment should a start-up company fail. However, 

representatives from an industry association and a broker-dealer firm 

cautioned that net worth is not easily identifiable or verifiable because 

they have to rely on information from the investor. For example, net 

liabilities—a component of net worth—are a complex measure to 

calculate and net worth can be subject to manipulation.

Of the two existing qualifying criteria, most market participants did not 

think income was the best criterion to balance investor protection and 

capital formation. One of the 27 market participants identified income 

alone as the most important criteria. However, one market participant said 

that it was more probable that an investor’s income could decline 

compared with net worth, and net worth tended to be a better indicator 

than income of an investor’s knowledge of the markets. For example, a 

wealthy professional would not necessarily have a guarantee that his or 

 

28We defined market acceptance as the willingness of the current marketplace and any 

new market players established by the proposed change to accept the new accredited 

investor qualification. 

29We asked market participants to rate the importance of existing and alternative criteria 

(for financial resources and understanding of financial risk). Some respondents said more 

than one criterion was the most important. As a result, for each criterion, we counted all 

instances in which the respondent identified a criterion as important. Therefore, totals may 

not add to 27. See appendix I for additional information on our scope and methodology 

and appendix III for structured interview results.

Market Participants Said 

Net Worth Best Balances 

Goals of Investor 

Protection and Capital 

Formation
 

Page 14 GAO-13-640 Accredited Investor

her income would remain the same or have the investment experience or 

financial wherewithal, depending on his or her profession, to invest in 

private placements. Nonetheless, an athlete or a doctor, for example, will 

qualify under the income standard, but it is unclear whether he or she 

could afford to hold the private placement for an indefinite period and 

whether he or she could afford a complete loss.

Market participants had differing opinions on whether the thresholds for 

the existing criteria should be adjusted, citing various advantages and 

disadvantages associated with balancing investor protection and capital 

formation. Some market participants (13 of 27) said the thresholds should 

be adjusted, two believed that the current thresholds should be increased, 

but differed on how much they should be increased. To better protect 

investors, some participants thought the levels should be increased to 

adjust for inflation—thus focusing on the original subset of the population 

that was targeted when the standards were first implemented. For 

example, officials from one industry group said that SEC designated the 

existing thresholds to identify a subset of the population that does not 

need SEC’s regulatory investor protection and therefore the thresholds 

should be readjusted periodically to ensure that the thresholds only 

capture the intended population. Others suggested the thresholds are 

very outdated and should be raised even higher than inflation.

However, almost an equal number of market participants (11 of 27) said 

the current thresholds should not be adjusted. For example, a number of 

participants commented that the net worth threshold already had been 

significantly adjusted because the primary residence is no longer 

considered as part of the net worth calculation. In addition, officials from 

an investor association said that regulators should take into account 

regional differences when considering changes to the thresholds as they 

represent a significant dollar amount in certain states with lower average 

income levels. Thus, adjusting the existing criteria could negatively affect 

some regions more than others. For example, in a rural state increased 

thresholds could negatively affect investors’ ability to qualify under the 

standard and make it harder for local start-up companies to seek 

investors and capital inside the state, according to an investor 

association.

Market participants had differing views on the impact of increasing the 

thresholds on investor protection (see fig. 3). Some thought that investor 

protection would be strengthened, and a similar number responded that 

Views on Potential 

Implications for Investor 

Protection and Capital 

Formation of Adjusting

Net Worth and Income 

Thresholds 
 

Page 15 GAO-13-640 Accredited Investor

increasing the current qualification criteria would have no effect on 

investor protection.

• Thirteen of the 27 individuals we interviewed said that increasing the 

minimum annual income requirement would strengthen investor 

protection. Ten of the 27 said it would have no effect, 3 said it would 

weaken, and 1 said they did not know.

• Similarly, 13 of the 27 market participants said that increasing the 

minimum net worth requirement would strengthen investor protection. 

Twelve said it would have no effect and 2 said it would weaken.

Figure 3: Market Participants’ Opinions on How Existing Criteria Would Affect 

Investor Protection, as of February-March 2013

Notes: We asked market participants if a change to the existing criteria would strengthen, weaken, or 

have no effect on investor protection. We then asked those who responded that a change would 

strengthen or weaken protection if the proposed change would greatly or somewhat strengthen (or 

weaken) investor protection. One market participant refused to answer on how increasing minimum 

annual income would affect investor protection.

Investor and industry associations that we interviewed separately did not 

support adjusting the thresholds of the existing criteria to increase 

investor protection. An investor association and an academic

acknowledged the importance of establishing thresholds to protect 

investors who may not have the knowledge or ability to protect 

themselves against making risky investments. Regardless of the 

thresholds, a representative from an investor association said that its 

investors completed due diligence on potential investments to protect 

their financial portfolio. Furthermore, industry associations representing 

attorneys and financial advisers involved in private placement generally 

agreed that the current qualification criteria were adequate. They said that 
 

Page 16 GAO-13-640 Accredited Investor

any changes to the thresholds might provide only marginal increases to 

investor protection.

Market participants’ views were more similar on the impact of increasing 

the income and net worth thresholds on capital formation for businesses 

(see fig. 4). Specifically, most said that increasing the thresholds would 

limit capital formation.

• Eighteen of the 27 individuals said increasing the minimum annual 

income requirement would limit capital formation. Eight of the 27 said 

it would have no effect and 1 said it would promote capital formation.

• Fifteen of the 27 individuals said increasing the minimum net worth 

requirement would limit capital formation. Ten said increasing the net 

worth requirement would have no effect on capital formation and 2 

said it would promote it.

Figure 4: Market Participants’ Opinions on How Existing Criteria Would Affect 

Capital Formation, as of February-March 2013

Note: We asked market participants if a change to the existing criteria would promote, limit, or have 

no effect on capital formation. We then asked those who responded that a change would promote or 

limit capital formation if the proposed change would greatly or somewhat strengthen (or weaken) 

capital formation.

Representatives from associations representing start-up companies and 

angel investors said that raising the current thresholds would limit capital 

formation. Specifically, the representatives said that raising the thresholds 

would reduce the current number of angel investors—a type of accredited 

investor who invests in start-up companies—and other eligible accredited 
 

Page 17 GAO-13-640 Accredited Investor

investors.30 A representative of a venture capital association told us that 

removing the primary residence from the net worth calculation was a 

significant adjustment to the current standard and that any further 

changes would further limit the pool of accredited investors, discourage 

angel investing, and ultimately hinder the ability of start-up companies to 

access capital.31 For instance, a representative of a network of angel 

investors said that he knew other accredited investors in the network who 

no longer qualified because of the 2011 change in the net worth 

calculation. However, according to an official from the North America 

Securities Administrators Association (NASAA) and a former regulator, 

start-up companies have other avenues to access capital such as new or 

expanded capital formation programs in the JOBS Act.32 As a result, the 

officials said that increasing the minimum thresholds would not limit a 

start-up company’s ability to access capital.

According to SEC staff, it does not have a list of accredited investors 

because maintaining such a list would be impractical because there are 

so many accredited investors and could raise privacy concerns. If 

maintaining such a list were possible, the costs of doing so would likely 

outweigh the benefits. Therefore, determining the potential impact of 

changes to the existing thresholds on the pool of accredited investors is 

 

30Angel investors are generally accredited investors who invest their own money in a startup company for an equity share. There are no databases of angel investors and no public 

records of their investment transactions. As a result, it is difficult to analyze data on the 

size of investments in start-up companies. According to one study, angel groups invest an 

average of more than $300,000 per deal, with an average of from four or five individual 

investors in each deal, investing an average of $68,000. One angel investor with whom we 

spoke said that her Kansas City-based network invested about $14,000 per investor. 

Another angel investor in Savannah, Georgia, said that investors in his network typically 

invested $25,000 to $50,000 per deal. 

31According to representatives from associations and an industry expert, sources of 

capital can be limited for start-up companies, magnifying the role of angel investors. For 

instance, one association that represents venture capital funds told us that the venture 

capital industry has been contracting and not investing in start-up companies. According 

to a representative from an investor association, many institutional investors no longer 

invest in venture capital funds because of the economic downturn and weak returns on 

investment.

32For example, Title IV of the JOBS Act increased the cap for Regulation A, an exemption 

from securities registration, from $5 million to $50 million and Title III created 

“crowdfunding,” which involves small businesses seeking funding over the Internet from 

investors putting up relatively small amounts of capital. However, the rules for Regulation

A and crowdfunding have not yet been finalized. For more on Regulation A, see 

GAO-12-839. 
 

Page 18 GAO-13-640 Accredited Investor

difficult. To estimate such impacts, we analyzed Survey of Consumer 

Finances data, the data that SEC also uses for these purposes. These 

data show that changing the thresholds for net worth and income would 

affect the pool of eligible accredited investors.33 Specifically, we found 

that increasing the minimum net worth or income thresholds would 

decrease the number of eligible household investors. Our analysis of 

federal household net worth data showed that adjusting the minimum 

thresholds to account for inflation from $1 million to approximately $2.3 

million—the inflation adjusted amount—would decrease the number of 

households qualifying as accredited from approximately 8.5 million to 

approximately 3.7 million. Table 2 illustrates how further adjusting the 

thresholds affects the number of eligible investors.

Table 2: Number of Households Eligible for Accredited Investor Status at Various 

Thresholds for Net Worth and Income, 2010

Income threshold Net worth threshold

Existing and 

hypothetical 

thresholds

Number of 

households 

Existing and 

hypothetical 

thresholds

Number of 

households

$100,000 21,600,000 $250,000 23,200,000

$200,000 (existing for 

individuals)

6,100,000 a $1,000,000 (existing) 8,500,000

$300,000 (existing for 

couples)

3,300,000 b $1,750,000 4,600,000

$400,000 2,400,000 $2,500,000 3,400,000

$500,000 1,700,000 $3,250,000 2,700,000

Source: GAO analysis of Federal Reserve data.

Notes: The Federal Reserve conducts the Survey of Consumer Finances every 3 years. The most 

recent data are from 2010. The information collected is based on household data, not individual data. 

Net worth excludes home equity. The hypothetical thresholds were nominal dollar amounts and not 

inflation adjusted. The results would be different if we applied current dollars because of inflation and 

 

33We analyzed information from the Survey of Consumer Finances, the best publicly 

available data for our purposes, as proxy data about households that met the current 

qualification criteria. The Survey of Consumer Finances is a nationally representative 

survey of households with information on income and net worth. However, there are 

important limitations to using the Survey of Consumer Finances to estimate the pool of 

accredited investors. First, the Survey of Consumer Finances data measures the income 

and wealth of households, not of individuals. In some cases, assets may not be jointly 

owned within a household. In addition, we could not determine whether households in the 

Survey of Consumer Finances data have been accredited investors in the past, and we 

may be overstating the households that might participate in the future. Finally, as with any 

survey, the issues of nonresponse and sample size affect the reliability of the data.
 

Page 19 GAO-13-640 Accredited Investor

changes in the economy. These thresholds were chosen arbitrarily to demonstrate how changing the 

thresholds could affect the numbers of eligible accredited investors. These estimates are relative to 

the total number of households represented by the survey, 118 million. In all cases, the confidence 

intervals associated with these estimates were plus or minus 15 percent of the estimates themselves, 

or less. For the purposes of this analysis, a household refers to the primary economic unit within a 

household (to which the Survey of Consumer Finances refers as a family). For more information 

(including standard errors) see appendix 1.

a”Existing for individuals” is the annual income threshold for an individual investor as required by SEC.

b”Existing for couples” is the annual income threshold for a married couple as required by SEC.

Market participants with whom we spoke said adjusting the thresholds 

upward for the existing net worth and income criteria would be feasible, 

but market acceptance would depend on how much the thresholds were 

adjusted.

• The majority of market participants (25 of 27) said it would be feasible 

to increase the income requirements and 24 of 27 said it would be 

feasible to increase the net worth thresholds.34

• Sixteen of 27 market participants said the market likely would accept 

increasing the minimum annual income requirement, and 17 said the 

market likely would accept increasing the minimum net worth 

requirement.

The extent to which the market would accept increased thresholds would 

depend on which part of the market is considered. For example,

according to four representatives from associations, the small business 

and investor communities would be resistant to increased thresholds 

because this would limit the pool of investors. However, according to 

NASAA, and an a consumer advocacy group they would support 

increased thresholds because it would bolster investor protection. One 

market participant noted that increasing the thresholds could be a 

problem for some existing investors if they no longer qualified under the 

new thresholds, and consideration would have to be given to their existing 

investments.

In our other interviews, market participants said that the current 

thresholds provide certainty and said while it is feasible to adjust them 

because they have not been adjusted, it would increase costs and 

 

34We asked market participants to rate the effects on feasibility and market acceptance on 

a scale of 1 to 5, with 1 being not feasible (or not likely to be accepted by the market) and 

5 being feasible (or extremely likely to be accepted by the market). Ratings of 3 or higher 

were grouped as “feasible” or “accepted by market.” 

Views on Feasibility and 

Market Acceptance of 

Adjusting Net Worth and 

Income Thresholds
 

Page 20 GAO-13-640 Accredited Investor

therefore not be well received by all market participants. For example, 

one industry expert and two representatives from investor associations 

said that the current criteria have the advantage of providing certainty for 

the industry, which encourages investments in start-up companies. 

However, the industry expert also thought the standard was overinclusive 

because of the increased number of people who can now meet the 

thresholds compared with the numbers eligible when the thresholds were 

first put into effect. Two representatives from industry associations also 

said that adjusting the thresholds upward would increase costs by 

changing internal systems and procedures for assessing investors’ status, 

making the adjusted thresholds less accepted.

In addition to asking about the existing criteria, we asked market 

participants about eight alternative criteria related to investors’ financial 

resources and their understanding of financial risk.35 We identified these 

alternative criteria from previous SEC proposed changes to the 

accredited investor standard, relevant academic literature, and criteria 

used by foreign regulators. While citing net worth as the most important, 

market participants indicated that using criteria for financial resources (25 

of 27) and understanding of financial risk (22 of 27) could both be 

important to determine accredited investor status. Among the financial 

resources criteria, market participants thought a liquid investments 

requirement (that is, a minimum dollar amount of investments in assets 

that can be easily sold, are marketable, and the value of which can be 

verified by a financial institution) was the most important for balancing 

investor protection and capital formation. Among the understanding of 

financial risk criteria, market participants selected the use of a registered 

investment adviser as most important (see fig. 5).

 

35We conducted structured interviews with a judgmental sample of 27 market participants 

recruited by their associations’ leadership and their peers. The results from the structured 

interviews are not generalizable to the population of market participants and only 

represent the opinions of these 27 individuals. See appendix I for additional information on 

our scope and methodology and appendix III for structured interview results, in particular 

market participants’ views of the alternative criteria that we asked about in tables 24-59.

Market Participants 

Identified Alternative 

Criteria SEC Could 

Use in the Investor 

Standard 
 

Page 21 GAO-13-640 Accredited Investor

Figure 5: Market Participants’ Views on Which Alternative Criterion Was Important 

for Balancing Investor Protection and Capital Formation, as of February 2013-March 

2013

Notes: We asked which of the criteria in the two categories (financial resources or understanding of 

financial risk) were most important. For the financial resources criteria, respondents could have 

selected income and net worth, but those results are not presented in this figure. Some respondents 

said more than one criterion was important. As a result, for each criterion, we counted all instances in 

which the respondent said that a criterion was important. Therefore, totals may not add to 27.

Market participants offered varying views on alternative criteria, citing 

advantages and disadvantages of either replacing criteria related to an 

investor’s financial resources or adding criteria related to an investor’s 

understanding of financial risk.

• Liquid investments requirement. Many market participants told us 

that the liquid investment criteria could either replace the current 

criteria or be added to it. A liquid investment requirement would 

require an investor to have a minimum dollar amount of investments 

in liquid assets, such as assets that can be easily sold, are 

marketable, and the value of which can be verified by a financial 

institution.36 As shown in figure 6, 13 of 27 market participants said 

 

36This criterion was based on an SEC proposal for an investment-owned standard and 

incorporated views from interviewees who said that such a standard should include liquid 

assets. In our questionnaire, we asked market participants their views about a criterion 

labeled “investments in securities” rather than liquid investments requirement. The 

labeling was changed in order to provide clarification in this report.
 

Page 22 GAO-13-640 Accredited Investor

that replacing the existing criteria with a new requirement related to an 

investor’s liquid investments would strengthen investor protection; 

however, 16 said it would limit capital formation.37 Many market 

participants thought that the liquid investments requirement should be 

considered as an addition to the existing accredited investor criteria.38

Three market participants said it was indicative of cumulative 

investment experience or an investors’ understanding of financial risk. 

Three market participants additionally commented that it was 

important for investors to have liquid assets because securities that 

are liquid could be easily liquidated to cover setbacks in investments.

Most market participants (17 of 27) said it would be feasible to replace 

the existing accredited investor standard with a liquid investment 

requirement. However, they were divided about whether it was likely 

to be accepted by the market (13 likely to accept, 13 unlikely to 

accept). Another association commented that a liquid investments 

requirement would be straightforward to implement. However, a few 

others said that investment portfolios might be difficult to verify and 

that asking financial institutions to verify investments would make this 

criterion less feasible. Two market participants as well as a 

representative from an industry association said that clearly defining 

liquid investments was important and that the definition would affect 

whether the criterion would be feasible.

• Fixed-percentage investment. Only one-third of market participants 

told us that the fixed-percentage criterion would strengthen investor 

protection (9 of 27). Few market participants told us that fixedpercentage should be considered as an addition to the current criteria

(5 of 27). A fixed- percentage investment would require an investor to 

limit their investments in a single, nonpublic securities offering to a 

certain percentage of their individual net worth or income. Many 

market participants said replacing the current standard with fixedpercentage investments would have no effect on investor protection 

 

37Eleven of 27 said liquid investments would have no effect on investor protection and 3 

said it would weaken it. Nine of 27 said liquid investments would have no effect on capital 

formation and 2 said it would promote it. 

38Twenty-six of 27 market participants provided additional comments on whether a liquid 

investments requirement or fixed-percentage requirement should be added. Of those, 12 

preferred a liquid investments requirement as an addition, 4 said either, and 1 preferred 

fixed-percentage investment. Seven market participants said neither should be added and 

2 comments were not relevant to the topic. 
 

Page 23 GAO-13-640 Accredited Investor

(14 of 27) and that it would limit capital formation (15 of 27).39 Five of 

27 market participants thought that the fixed-percentage requirement 

should be considered as an addition to the current standard. Two 

market participants noted that this criterion would help to promote 

diversification in an investor’s portfolio and could promote investor 

protection. For example, one representative from an industry 

association told us that an individual’s investment portfolio would 

better approximate financial resources than net worth or income and 

another representative from an industry association said it would help 

to minimize risk posed to investors.

However, in general, market participants thought that replacing the 

existing criteria would not be feasible (18 of 27) and not likely be 

accepted by the market (19 of 27). Two market participants 

commented that it would be difficult to implement and it might be 

burdensome to update and monitor the percentage figure. 

Furthermore, one market participant said that if an investor is only 

able to invest a small amount due to the fixed-percentage limit 

entrepreneurs might not find that small amount helpful.

Figure 6: Market Participants’ Opinions on Replacing the Current Standard with 

Alternative Criteria for Financial Resources, as of February-March 2013

 

39Nine of 27 said fixed-percentage would strengthen investor protection and 4 said it 

would weaken it. Ten of 27 said fixed-percentage would have no effect on capital 

formation and 2 said it would promote it. 
 

Page 24 GAO-13-640 Accredited Investor

Notes: We asked market participants if replacing the current standard with a liquid investments or 

fixed-percentage investment criterion would strengthen, weaken, or have no effect on investor 

protection. We then asked those who responded with strengthen or weaken if the new standard 

would greatly or somewhat strengthen or weaken. We also asked market participants if replacing the 

current standard with a liquid investments or fixed-percentage investment requirement would limit, 

promote, or have no effect on capital formation. We then asked those who responded with promote or 

limit if the new standard would greatly or somewhat promote or limit.

Market participants also offered a range of views on alternative criteria 

related to an investor’s understanding of financial risk. Figure 7 

summarizes participants’ views on these alternatives.

Figure 7: Market Participants’ Opinions on the Impact of Adding Criteria for Understanding Financial Risk, as of FebruaryMarch 2013

Notes: We asked market participants if adding criteria for understanding financial risk to the current 

standard would strengthen, weaken, or have no effect on investor protection or capital formation. We 

then asked those who responded with strengthen or weaken if the effect would greatly or somewhat 

strengthen or weaken investor protection. We asked market participants if adding any of the criteria 

for understanding financial risk to the current standard would limit, promote, or have no effect on 

capital formation. We then asked those who responded with limit or promote if the new criterion would 

greatly or somewhat limit or promote capital formation. One market participant did not know the effect 

of adding the registered investment adviser criterion on capital formation.

• Registered investment adviser requirement. Of the six alternative 

criteria related to an investor’s understanding of financial risk, 

participants most often said that the registered investment adviser 

criterion should be added to the existing criteria. That is, the criterion 

would require an investor who wishes to invest in a private placement 

offer to use the services of a registered investment adviser to manage 
 

Page 25 GAO-13-640 Accredited Investor

their investment accounts. A majority of market participants (14 of 27) 

thought that adding a registered investment adviser criterion to the 

current standard would strengthen investor protection but were 

divided about its effects on capital formation (see fig. 7).40 Some 

market participants and an industry association we interviewed noted 

that advisers examined the financial needs of their clients. As a result, 

they determined this requirement would promote investor protection.

In addition, most market participants (21 of 27) said that having a 

registered investment adviser criterion would be feasible to implement 

and that the market would be willing to accept it. For example, two 

market participants told us that this criterion could be feasible to 

implement because advisers were already vetted (registered and 

subject to regulation). Another market participant said that having an 

adviser would be a practical and objective way to approximate 

understanding of financial risk. However, one market participant said 

that this standard represents a new cost to investors because they 

would have to pay for the services of a registered adviser. In addition, 

representatives from an investment adviser firm and an angel investor 

group said that investment advisers might not recommend private 

placements because of their asset management role and 

compensation structure. That is, investment advisers buy and sell 

assets on behalf of their clients and generally base their fees on the 

assets managed. Because investments in private placements would 

be illiquid, investment advisers would not be able to manage the asset 

to generate greater return. As a result, the compensation structure for 

investment advisers would not readily accommodate private 

placements.

• Self-certification investor designation. While market participants 

were divided on the impact of adding a self-certification criterion on 

investor protection, they generally agreed on the impact on capital 

formation.41 Through a self-certification process the investor would 

self-certify based on standards, such as membership in a network of 

investment groups, work experience (director of a company), or 

investment experience. Ten market participants told us a self-

 

40Six of 27 said registered investment adviser criterion would weaken investor protection 

and 7 said it would have no effect. Six said criterion would limit investor protection and 1 

said he or she did not know. 

41Seventeen of 27 said self-certification would promote capital formation. Nine of 27 said 

self-certification would have no effect on capital formation, and 1 said it would limit it. 
 

Page 26 GAO-13-640 Accredited Investor

certification process would weaken investor protection; 11 said it 

would have no effect. However, the majority (17 of 27) said it would 

promote capital formation. One market participant expressed 

concerns that individuals could self-certify to become an investor 

without actually meeting the qualification criteria. Another said that 

self-certification based on being in an investment group or being a 

director would not approximate understanding of financial risk. 

Another market participant commented that having a self-certification 

option would emphasize to potential investors that they should not 

take investments in private placements lightly.

Market participants had favorable views about the feasibility and likely 

market acceptance related to a self-certification criterion. A majority of 

market participants said that self-certification was feasible (19 of 27) 

and that the market would be willing to accept it (23 of 27). One

market participants said that self-certification was similar to the 

current process in which investors self-certify that they meet either 

income or net worth thresholds. Moreover, representatives from an 

investment company association said that investment and work 

experience would demonstrate an individual’s ability to analyze 

investments. However, a representative from NASAA cautioned that 

the standards for qualifying work experience would have to be 

specific. 

• License and certification standard. Market participants had 

conflicting views about the effect of adding a new licenses and 

certification requirement to the existing criteria. Under such a criterion, 

an investor would have to demonstrate knowledge of financial risks 

related to private placement investments to receive a license from 

regulators or authorized third parties. About the same number of 

market participants said that adding such a requirement would 

strengthen, weaken, or have no effect on investor protection (10, 8, 

and 9, respectively). Furthermore, 12 of 27 participants said it would 

promote capital formation and 10 of 27 said that it would have no 

effect. Five participants said the requirement would limit capital 

formation. A market participant said that having a license and 

certification requirement would encourage unscrupulous companies to 

develop and issue certification without appropriately making 

assessments. Another market participant told us that having a license 

might not mean that these investors could absorb the loss.

Many market participants (15 of 27) did not think it would be feasible 

to add a license and certification requirement. Three market 

participants and two representatives from associations raised a 

number of issues including that some investors might be unwilling to 
 

Page 27 GAO-13-640 Accredited Investor

take the steps to be licensed. Nevertheless, 16 of 27 market 

participants thought the market would accept it.

• Investor sophistication test. Many market participants told us that 

adding the sophistication test criterion to the existing criteria would not 

likely be accepted by the market. With this criterion, an investor would 

complete SEC-approved investor education classes and pass a test 

that would qualify them as accredited. About the same number of 

market participants said that adding an investor sophistication test 

would either strengthen or have no effect on investor protection. 

Furthermore, 11 of 27 participants said that there would be no effect 

on capital formation; the remaining were split on whether the test 

would promote or limit it.

While many participants (16 of 27) thought that the market would 

accept the addition of a test, market participants were split on whether 

a test would be feasible. Representatives from two industry 

associations suggested that investors could take the investments 

segment of the examination for stockbrokers. However, two market 

participants raised questions about whether investors would be willing 

to take the test or spend time to prepare for it and take a test to 

become a certified sophisticated investor. Furthermore, 

representatives from another association said the test could quickly 

become overly complex given the variety of investments available and 

the frequency of changes in investment products. Also, 

representatives from associations questioned who would administer 

the test and where the resources to administer the test would come 

from.

• Education standard. Under this criterion, an investor would qualify 

as accredited based on an advanced degree in business or finance, 

or a chartered financial analyst credential or similar designation. While 

14 of 27 market participants told us that an education criterion would 

have no effect on investor protection, 11 of the participants said 

education would promote capital formation.42 For example, one 

market participant said that the education criterion would allow 

younger people who might not have financial resources but 

understood financial risks to invest in private placement offerings. 

However, two market participants said that having an advanced 

 

42Eight of 27 said education would strengthen investor protection and 5 said it would 

weaken it. Nine of 27 said the criterion would have no effect on capital formation and 7 

said the criterion would limit it. 
 

Page 28 GAO-13-640 Accredited Investor

degree, such as in business, would not necessarily give an investor 

the necessary knowledge to invest wisely. A majority of market 

participants said that an education criterion would be feasible (23 of 

27) and that the market would be willing to accept it (18 of 27). 

Representatives from one industry association we interviewed said 

verifying education would be a simple process. However, one market 

participant said that market acceptance would depend on the 

documentation that would be required of the investor.

• Opt-in provision. Market participants’ views were divided about the 

inclusion of an opt-in provision. With an opt-in provision, the investor 

would sign a statement that waives significant rights to file a complaint 

to seek compensation unless there is fraud on the part of the issuer. A 

majority (17 of 27) of market participants said that the provision would 

decrease investor protection.43 One market participant commented 

that the provision would decrease investor protection because it would 

take away the burden of proof from an issuer in relation to fraud. An 

equal number of participants said that it would promote or have no 

effect on capital formation. Market participants had more favorable 

views about the feasibility and likely market acceptance of a new optin criterion. A majority of market participants said that it would be 

feasible (17 of 27) and that the market would be willing to accept it (21 

of 27). For example, one market participant said that an opt-in form 

would be easy to implement. However, two market participants noted 

that state securities regulators would object strongly to the addition of 

this criterion because it decreased protection for investors.

The intended purposes of the accredited investor standard are to protect 

investors and streamline capital formation for small businesses. However, 

beyond excluding an investor’s primary residence in the calculation of net 

worth in 2010, the standards for qualifying as an individual accredited 

investor have remained unchanged since the 1980s. As a result, some 

market participants and policymakers have raised concerns about 

diminished investor protection as the numbers of individuals able to 

qualify as accredited has increased over the years. Of the existing criteria 

for qualifying as an accredited investor, most market participants with 

whom we spoke said that net worth was the most important criterion for 

balancing investor protection and capital formation. However, these 

 

43Seven of 27 said the provision would have no effect on investor protection and 3 said it 

would strengthen it. 

Conclusions 
 

Page 29 GAO-13-640 Accredited Investor

participants also identified alternative criteria that could also achieve 

these goals. Specifically, market participants we spoke with most often 

supported adding an investment requirement or use of an investment 

adviser as an alternative criterion that would balance investor protection 

and capital formation, be relatively feasible to implement, and have some 

level of acceptance by the market. SEC must review the definition of 

accredited investor every 4 years beginning in 2014. Our report on market 

participants’ views on the existing and alternative qualification criteria for 

accredited investor status will be published in July 2013. By examining 

the potential effects of the existing and alternative criteria when it 

conducts its review in 2014, SEC could help ensure that it is using the 

most appropriate ones for qualifying investors as accredited.

To further advance the goals of balancing investor protection and capital 

formation in its accredited investor standard, SEC should consider 

alternative criteria, including those in this report, to help determine an 

individual’s ability to bear and understand the risks associated with 

investing in private placements. For example, market participants that we

spoke with identified adding a liquid investment requirement or use of an 

investment adviser as alternative criteria that would balance investor 

protection and capital formation, be relatively feasible to implement, and 

have some level of acceptance by the market.

We provided SEC a draft copy of this report for their review and 

comment. SEC provided written comments that are reprinted in appendix 

IV. SEC also provided technical comments that were incorporated as 

appropriate. 

In its written comments, SEC agreed with our recommendation. 

Specifically, SEC noted that the Dodd-Frank Act requires the agency to 

review the definition of accredited investors four years after the law’s 

enactment. SEC said that it would consider alternative criteria 

(particularly, adding liquid investments and the use of a registered 

adviser) when it completes its mandated review.

We are sending copies of this report to the Chairman of the Securities 

and Exchange Commission, the appropriate congressional committees, 

and other interested parties. In addition, the report will be available at no 

charge on GAO’s website at http://www.gao.gov. 

Recommendation for 

Executive Action

Agency Comments
 

Page 30 GAO-13-640 Accredited Investor

If you or your staffs have any questions about this report, please contact 

me at (202) 512-8678 or clowersa@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix V.

A. Nicole Clowers

Director, Financial Markets

 and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-13-640 Accredited Investor

This report examines market participants’ views on (1) the existing criteria 

for qualifying for accredited investor status, and (2) alternative financial 

and other qualification criteria.

For both objectives, we reviewed the Securities and Exchange 

Commission’s (SEC) current definition and legislative history of the 

standard. We reviewed SEC’s proposed changes to the accredited 

investor standard since 2006, market participants’ comment letters to 

SEC regarding these proposals, and academic literature related to 

accredited investors and private placements. We interviewed and asked 

officials from the SEC, Financial Industry Regulatory Authority (FINRA), 

and North American Securities Administrators Association (NASAA) for 

their views about the current and proposed accredited investor standards. 

We asked SEC, FINRA, NASAA, the Department of Treasury, Commodity 

Futures Trade Commission, and Consumer Financial Protection Bureau

about any financial literacy efforts directed at individuals who qualify as 

accredited investors and they told us that they were not aware of any 

relevant financial literacy efforts that we could consider. We interviewed 

officials from the Ontario (Canada) Securities Commission and United 

Kingdom Financial Services Authority to obtain information about their 

investor standards, especially those similar to the U.S. accredited investor 

standard. We conducted interviews with academics; lawyers 

knowledgeable about accredited investor issues; other securities market 

and investment experts; trade associations representing investors, capital 

formation groups, small businesses, and private equity groups. These 

associations included the Securities Industry and Financial Markets 

Association, Angel Capital Association (ACA), National Venture Capital 

Association (NVCA), American Association of Individual Investors (AAII), 

Investment Adviser Association (IAA), National Small Business 

Association, SecondMarket, and the Investment Company Institute.

To examine market participants’ views on the existing criteria for 

accredited investor status, and the potential effects of changes to the 

standard on investor protection and capital formation, we conducted 

structured interviews by telephone with a judgmental sample of 27 market 

participants whom we categorized in four groups intended to represent 

different segments of the accredited investor population: (1) attorneys 

who have experience in private placement transactions, (2) accredited 

investors who invest in private placement securities, (3) retail investors 

who meet the current accredited investor criteria but do not actively invest 

in private placement securities, and (4) investment advisers and brokerdealers who work with accredited investors. We asked the participants of 

the structured interviews (market participants) about the feasibility, 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 32 GAO-13-640 Accredited Investor

likelihood of market acceptance, and impact on investor protection and 

capital formation of adjusting the existing criteria.1 We worked with 

associations to identify market participants to interview. We identified 

seven associations that represent the types of individuals in the four 

groups described above. These associations are the American Bar 

Association, the Securities Industry and Financial Markets Association, 

the Financial Services Institute, ACA, AAII, IAA, and NVCA. We selected 

these groups from a broader list of organizations we previously identified 

as knowledgeable about accredited investors or that were recommended 

by others. These organizations then recruited members to participate in 

the interviews. We also asked participants for referrals to other individuals 

who might be interested in participating.

Our sample of 27 market participants consisted of 11 attorneys, 5 

investment advisers, 5 angel investors, and 6 retail investors who qualify 

as accredited investors but do not actively invest in unregistered 

securities. We asked them demographic questions to learn more about 

their backgrounds and help put their responses in context.

• We interviewed 11 attorneys, of whom 1 had more than 4 years of 

experience with Regulation D transactions, 1 had more than 11 years 

of experience, and 9 had more than 20 years. They represented 

accredited investors, issuers, and placement agents and practiced in 

different cities throughout the United States, although 5 were located 

in New York City or Washington, D.C.

• We interviewed 5 broker-dealers or investment advisers: 3 said they 

recommended Regulation D investments to clients at least once a 

week; 1 said once a month; and 1 said several times a year. The size 

of their firms ranged from less than 50 employees to 5,000 employees 

or more. We did not ask the advisers about their geographic location.

• We interviewed 5 angel investors, 1 of whom had 4 more than 10 

years of experience investing in private placements, and 4 who had 

 

1

We defined feasibility as the simplicity and ease with which the proposed change to the

accredited investor qualification could be implemented in the securities market. We 

defined market acceptance as the willingness of the current marketplace and any new 

market players established by the proposed change to accept the new accredited investor

qualification. We explained effects on investor protection as how any proposed change to 

the accredited investor qualification would or would not maintain market participants’ legal 

protections for similar financial products and services (including sales practice standards 

and suitability requirements). For capital formation, we emphasized how any change 

would or would not facilitate capital formation for businesses.
Appendix I: Objectives, Scope, and 

Methodology

Page 33 GAO-13-640 Accredited Investor

more than 11 years of experience. They invested in industries 

including information technology, biotechnology, health care, energy, 

medical devices and equipment, and energy. The companies in which 

the group members invested were primarily located in the Midwest, 

but two individuals invested in start-up companies throughout the 

United States.

• We interviewed 6 retail investors over the age of 55, all of whom had 

at least a bachelor’s degree and 1 of whom occasionally used the 

services of an investment adviser. They resided in different regions of 

the United States.

We conducted the structured interviews from February through March 

2013. One team member asked the questions while a second recorded 

the responses in a web-based questionnaire. We took steps to minimize 

errors, such as difficulties interpreting a particular question, by pretesting 

the interview questions with one member from each of the groups in 

January 2013. We conducted pretests to make sure that the questions 

were clear and unbiased and that they did not place an undue burden on 

respondents. An independent survey specialist within GAO also reviewed 

a draft of the questions prior to their administration. We made appropriate 

revisions to the content and format of the questionnaire after the pretests 

and independent review. The results from the structured interviews are 

not generalizable to the population of market participants and only 

represent the opinions of these 27 individuals. However, as described 

above we took steps to obtain opinions from a diverse group of market 

participants.

Because the population of accredited investors is unknown, we performed 

an additional analysis to suggest how changing the thresholds for net 

worth and income would affect the pool of eligible investors. We used 

data from the Survey of Consumer Finances (SCF), which the Board of 

Governors of the Federal Reserve System (Federal Reserve) issues 

every 3 years, to examine how changing the thresholds would affect the 

pool of eligible households represented by survey respondents. For the 

purposes of this analysis, a household refers to the primary economic unit 

within a household (to which the SCF refers as a family). We used net 

worth and income as defined in a Federal Reserve publication about the 

SCF.2 For net worth, we excluded home equity. We did not attempt to 

 

2

See Jesse Bricker, et al., “Changes in U.S. Family Finances from 2007 to 2010: 

Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin 98, no. 2 

(Washington, D.C.: June 2012).
Appendix I: Objectives, Scope, and 

Methodology

Page 34 GAO-13-640 Accredited Investor

determine the appropriate threshold based on a household’s marital 

status. For the estimates in table 3, we followed SCF guidance and 

estimated the standard errors (which appear in parentheses). We found 

the data to be sufficiently reliable to evaluate household income and net 

worth levels.

Table 3: Estimates and Standard Errors for Number of Households by Various 

Income and Net worth Thresholds, 2010

Income thresholds No. of households Net worth thresholds No. of households

$100,000 21,594,413

(568,939) 

$250,000 23,236,369

(676,120) 

$200,000 6,082,187

(253,009)

$1,000,000 8,461,537

(341,419) 

$300,000 3,275,211

(188,025) 

$1,750,000 4,557,745

(305,970) 

$400,000 2,412,365

(165,145) 

$2,500,000 3,361,619

(252,454)) 

$500,000 1,686,801

(123,750) 

$3,250,000 2,668,236

(168,482) 

Source: GAO analysis of Federal Reserve data.

Note: Standard errors in parentheses.

To examine market participants’ views on alternative financial and other 

qualification criteria, we identified accredited investor criteria that market 

participants and others proposed, and identified relevant criteria used by 

the Ontario (Canada) Securities Commission and the United Kingdom 

Financial Services Authority to qualify similar types of investors. From the 

list of proposed and foreign regulator criteria, we identified a list of criteria 

that was consistent with the intended purpose of the accredited investor 

standard and that could be used to qualify individual investors as 

accredited. We grouped these criteria into two categories: investors’ 

access to financial resources and their understanding of financial risk.

(1) Investor’s financial resources

• Liquid investments requirement. Investors would have to have 

a minimum dollar amount of investment in liquid assets (that is, 

assets that can be easily sold, are marketable, and the value of 

which can be verified by a financial institution).
Appendix I: Objectives, Scope, and 

Methodology

Page 35 GAO-13-640 Accredited Investor

• Fixed-percentage investment. Investors would be limited in their 

investments in single, nonpublic securities offerings to a certain 

percentage of their individual net worth or income.

(2) Investor’s understanding of financial risk

• Licenses/certification. Investors would have to demonstrate 

knowledge of financial risks related to private placement 

investments to receive licenses from regulators or authorized third 

parties.

• Investor sophistication test. Investors would complete SECapproved investor education classes and pass a test that would 

qualify them as accredited.

• Self-certifying as a sophisticated investor. Investors would selfcertify based on standards such as membership in a network of 

investment groups, work experience, or investment experience.

• Education. Investors would qualify as accredited based on an 

advanced degree in business or finance, a chartered financial 

analyst credential, or similar designation.

• Opt-in provision. Investors would sign a statement that waives 

significant rights to file a complaint or seek compensation unless 

there is fraud on the part of the issuer.

• Registered investment adviser requirement. Investors who 

wished to invest in private placement offerings would have to use 

the services of registered investment advisers to manage their 

investment accounts.

We asked the 27 market participants if the current standard (income and 

net worth) should be adjusted and to identify the most important criteria 

for balancing capital formation and investor protection from the two 

respective categories. We asked the market participants three different 

lines of questions: (1) the effect of increasing or decreasing the minimum 

income or net worth thresholds; (2) the effect of replacing the current 

standard with an alternative criterion for financial resources; (3) the effect

of adding a criterion for understanding financial risk to the current 

standard. By replace, we meant that potential investors must qualify 

under the alternative criterion. By add, we meant if potential investors did 

not qualify under the current standard, they could qualify under an 

alternative. For each criterion, we asked about the effects on feasibility, 

likelihood of market acceptance, and impact on investor protection and 

capital formation. We did not ask about the effects of adding alternative 

financial resources criteria to the current standard or replacing the current 

standard with criteria for understanding financial risk. However, we asked 

market participants if the current standard should be added with a 
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-13-640 Accredited Investor

criterion for financial resources and if any criterion for understanding 

financial risk should be replaced to the current standard. Appendix III 

includes the questions that we asked market participants and our results.

We compared response patterns between the four types of market 

participants that we interviewed and found that generally, there were little 

differences in those patterns. A response pattern is the variability in 

response options chosen. For example, all 11 lawyers responded that the 

education standard was feasible, whereas other groups responded that it 

was feasible (12) or somewhat or not feasible (4). However, we cannot 

conclude that the differences indicate a statistical difference in opinion 

because of the small and varying sample sizes of each group and the fact 

that they are not statistically representative samples.

We conducted this performance audit from June 2012 to July 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Summary of Rules for Exemption 

from Registration under Regulation D

Page 37 GAO-13-640 Accredited Investor

The Securities Act of 1933 generally requires securities issuers to register 

securities offerings with SEC. However, the act exempts certain offerings 

from registration, which SEC has implemented by regulation when it 

determines that the registration procedure is not required for investor 

protection. Regulation D, adopted by SEC in 1982, describes terms and 

conditions that qualify a securities offering for an exemption from 

registration. Regulation D contains multiple rules, which include 

definitions of terms, general conditions applicable to the offerings, 

requirements for exemptions, and deadlines for notices of claims of 

exemptions. Table 4 summarizes Rules 504, 505, and 506, which 

establish registration exemptions.

Table 4: Summary of Requirements for Exemptions under Rules 504-506 of SEC Regulation D, as of June 14, 2013 

Requirements for exemption Rule 504 Rule 505 Rule 506 

Number and type of investors who 

may invest

No set investor limit An unlimited number of

accredited investors and up to 

35 nonaccredited investors

An unlimited number of

accredited investors and up to 

35 nonaccredited,

sophisticated investors

Maximum dollar size of securities 

offering

Up to $1 million in any 12-

month period

Up to $5 million in any 12-

month period

No set dollar limit

Restricted securities resales Yes, unless certain conditions 

are met

Yes Yes

Disclosure documents required to be 

delivered to investors 

Under state law requirements 

pursuant to certain conditions

Yes, to non-accredited 

investors

Yes, to non-accredited 

investors

Restrictions on general solicitation 

and advertising for investors

Yes, unless certain conditions 

are met

Yes Yes

Subject to federal and state antifraud 

provisions

Yes Yes Yes

SEC Form D filing required Yes Yes Yes

State registration required Yes, unless there is a state

exemption

Yes, but most states have 

state exemptions, such as the 

Uniform Limited Offering 

Exemption

No, preempted from state

registration by National 

Securities Markets 

Improvement Act of 1996

Type of issuers that cannot use 

exemption

Blank check companies,

investment companies, or SEC 

reporting companies

Investment companies None

Source: GAO analysis of Regulation D rules.

Appendix II: Summary of Rules for 

Exemption from Registration under 

Regulation D
Appendix III: Summary of Results from Our 

Structured Interviews

Page 38 GAO-13-640 Accredited Investor

We conducted structured interviews to determine the potential impact on 

investor protection and capital formation of replacing or adding alterative 

criteria to the existing criteria for determining accredited investor status. 

We also asked market participants’ opinions about the potential impact on 

investor protection and capital formation of marketing and advertising 

securities offerings under Regulation D, Rule 506. We interviewed 27 

individuals representing different segments of the accredited investor 

population: 11 attorneys who represent issuers of private placements, 5 

investment advisers, 5 individuals who are active investors in private 

placements, and 6 individuals who meet the current criteria for accredited 

investor status but are not active investors. The interviews were 

conducted from February through March 2013. For more information 

about our methodology for designing and conducting these interviews, 

see appendix I.

Table 5: Do You Believe the Current Qualification Criteria Should be Adjusted or 

Should Not Be Adjusted? 

Response Count

Should be adjusted 13

Should not be adjusted 11

Don’t know 3 

Source: GAO analysis of structured interviews.

Table 6: On a Scale of 1 to 5, Where 1 Is Not Important and 5 Is Extremely Important, 

How Important Are Financial Resources in Determining Accredited Investor Status?

Response Count

1 (not important) 0 

2 2 

3 3 

4 9 

5 (extremely important) 13

Source: GAO analysis of structured interviews.

Appendix III: Summary of Results from Our 

Structured Interviews
Appendix III: Summary of Results from Our 

Structured Interviews

Page 39 GAO-13-640 Accredited Investor

Table 7: On a Scale of 1 to 5, Where 1 Is Not Important and 5 Is Extremely Important, 

How Important Is Understanding Financial Risk in Determining Accredited Investor 

Status? 

Response Count

1 (not important) 2 

2 3 

3 3 

4 9 

5 (extremely important) 10

Source: GAO analysis of structured interviews.

Table 8: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Increasing the Minimum Annual Income Requirement?

Response Count

1 (not feasible) 0 

2 2 

3 6 

4 2 

5 (extremely feasible) 17

Source: GAO analysis of structured interviews.

Table 9: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Increasing the Minimum Annual Income 

Requirement?

Response Count

1 (not likely) 3 

2 8 

3 8 

4 4 

5 (extremely likely) 4 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 40 GAO-13-640 Accredited Investor

Table 10: Would Increasing the Minimum Annual Income Requirement Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 4 

Somewhat strengthen 9 

No effect 10

Somewhat weaken 1 

Greatly weaken 2 

Refuse to answer 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 11: Would Increasing the Minimum Annual Income Requirement Promote, 

Limit, or Have No Effect on Capital Formation for Businesses?

Response Count

Greatly promote 0 

Somewhat promote 1 

No effect 8 

Somewhat limit 11

Greatly limit 7 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 12: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Decreasing the Minimum Annual Income Requirement?

Response Count

1 (not feasible) 3 

2 2 

3 2 

4 3 

5 (extremely feasible) 17

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 41 GAO-13-640 Accredited Investor

Table 13: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Decreasing the Minimum Annual Income 

Requirement?

Response Count

1 (not likely) 2 

2 1 

3 1 

4 6 

5 (extremely likely) 17

Source: GAO analysis of structured interviews.

Table 14: Would Decreasing the Minimum Annual Income Requirement Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 0 

Somewhat strengthen 3 

No effect 7 

Somewhat weaken 11

Greatly weaken 6 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 15: Would Decreasing the Minimum Annual Income Requirement Promote, 

Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 4 

Somewhat promote 17

No effect 5 

Somewhat limit 0 

Greatly limit 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 42 GAO-13-640 Accredited Investor

Table 16: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Increasing the Minimum Net Worth Requirement?

Response Count

1 (not feasible) 2 

2 1 

3 4 

4 7 

5 (extremely feasible) 13

Source: GAO analysis of structured interviews.

Table 17: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Increasing the Minimum Net Worth 

Requirement?

Response Count

1 (not likely) 4 

2 6 

3 11

4 3 

5 (extremely likely) 3 

Source: GAO analysis of structured interviews.

Table 18: Would Increasing the Minimum Net Worth Requirement Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 4 

Somewhat strengthen 9 

No effect 12

Somewhat weaken 1 

Greatly weaken 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 43 GAO-13-640 Accredited Investor

Table 19: Would Increasing the Minimum Net Worth Requirement Promote, Limit, or 

Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 0 

Somewhat promote 2 

No effect 10

Somewhat limit 11

Greatly limit 4 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 20: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Decreasing the Minimum Net Worth Requirement?

Response Count

1 (not feasible) 2 

2 2 

3 4 

4 5 

5 (extremely feasible) 14

Source: GAO analysis of structured interviews.

Table 21: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Decreasing the Minimum Net Worth 

Requirement?

Response Count

1 (not likely) 2 

2 2 

3 0 

4 7 

5 (extremely likely) 16

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 44 GAO-13-640 Accredited Investor

Table 22: Would Decreasing the Minimum Net Worth Requirement Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 0 

Somewhat strengthen 1 

No effect 6 

Greatly weaken 6 

Somewhat weaken 14

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 23: Would Decreasing the Minimum Net Worth Requirement Promote, Limit, 

or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 4 

Somewhat promote 14

No effect 6 

Somewhat limit 3 

Greatly limit 0 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 24: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Replacing the Current Standard with a Liquid Investment 

Requirement?

Response Count

1 (not feasible) 6 

2 4 

3 7 

4 5 

5 (extremely feasible) 5 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 45 GAO-13-640 Accredited Investor

Table 25: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Replacing the Current Standard with a 

Liquid Investment Requirement?

Response Count

1 (not likely) 6 

2 7 

3 9 

4 3 

5 (extremely likely) 1 

Don’t Know 1 

Source: GAO analysis of structured interviews.

Table 26: Would Replacing the Current Standard with a Liquid Investment 

Requirement Strengthen, Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 7 

Somewhat strengthen 6 

No effect 11

Greatly weaken 1 

Somewhat weaken 2 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 27: Would Replacing the Current Standard with a Liquid Investment 

Requirement Promote, Limit, or Have No Effect on Capital Formation for 

Businesses? 

Response Count

Greatly promote 0 

Somewhat promote 2 

No effect 9 

Somewhat limit 12

Greatly limit 4 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 46 GAO-13-640 Accredited Investor

Table 28: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Is Replacing the Current Standard with a Fixed-Percentage 

Investment?

Response Count

1 (not feasible) 6 

2 12

3 4 

4 2 

5 (extremely feasible) 3 

Source: GAO analysis of structured interviews.

Table 29: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Replacing the Current Standard with a 

Fixed-Percentage Investment?

Response Count

1 (not likely) 6 

2 13

3 8 

4 0 

5 (extremely likely) 0 

Source: GAO analysis of structured interviews.

Table 30: Would Replacing the Current Standard with a Fixed-Percentage 

Investment Strengthen, Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 5 

Somewhat strengthen 4 

No effect 14

Somewhat weaken 3 

Greatly weaken 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 47 GAO-13-640 Accredited Investor

Table 31: Would Replacing the Current Standard with a Fixed-Percentage 

Investment Promote, Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 0 

Somewhat promote 2 

No effect 10

Somewhat limit 12

Greatly limit 3 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 32: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Would It Be to Add a Licenses or Certification Standard to the Current 

Standard?

Response Count

1 (not feasible) 8 

2 7 

3 4 

4 5 

5 (extremely feasible) 3 

Source: GAO analysis of structured interviews.

Table 33: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding Licenses or Certification to the 

Current Standard? 

Response Count

1 (not likely) 6 

2 5 

3 2 

4 9 

5 (extremely likely) 5 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 48 GAO-13-640 Accredited Investor

Table 34: Would Adding a Licenses or Certification Standard to the Current 

Standard Strengthen, Weaken, or Have no Effect on Investor Protection? 

Response Count

Greatly strengthen 7 

Somewhat strengthen 3 

No effect 9 

Somewhat weaken 3 

Greatly weaken 5 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 35: Would Adding a Licenses or Certification Standard to the Current 

Standard Promote, Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 4 

Somewhat promote 8 

No effect 10

Somewhat limit 0 

Greatly limit 5 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 36: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Would It Be to Add an Investor Sophistication Test to the Current 

Standard?

Response Count

1 (not feasible) 8 

2 6 

3 6 

4 3 

5 (extremely feasible) 4 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 49 GAO-13-640 Accredited Investor

Table 37: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding an Investor Sophistication Test to 

the Current Standard?

Response Count

1 (not likely) 6 

2 5 

3 6 

4 4 

5 (extremely likely) 6 

Source: GAO analysis of structured interviews.

Table 38: Would Adding an Investor Sophistication Test to the Current Standard 

Strengthen, Weaken, or Have No Effect on Investor Protection?

Response Count

Greatly strengthen 5 

Somewhat strengthen 6 

No effect 12

Somewhat weaken 1 

Greatly weaken 3 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 39: Would Adding an Investor Sophistication Test to the Current Standard 

Promote, Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 1 

Somewhat promote 7 

No effect 11

Somewhat limit 5 

Greatly limit 3 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 50 GAO-13-640 Accredited Investor

Table 40: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Would It Be to Add a Self-Certified Sophisticated Investor 

Designation to the Current Standard?

Response Count

1 (not feasible) 5 

2 3 

3 5 

4 3 

5 (extremely feasible) 11

Source: GAO analysis of structured interviews.

Table 41: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding a Self-Certified Sophisticated 

Investor Designation to the Current Standard?

Response Count

1 (not likely) 4 

2 0 

3 4 

4 10

5 (extremely likely) 9 

Source: GAO analysis of structured interviews.

Table 42: Would Adding a Self-Certified Sophisticated Investor Designation to the 

Current Standard Strengthen, Weaken, or Have No Effect on Investor Protection?

Response Count

Greatly strengthen 4 

Somewhat strengthen 2 

No effect 11

Somewhat weaken 8 

Greatly weaken 2 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 51 GAO-13-640 Accredited Investor

Table 43: Would Adding a Self-Certified Sophisticated Investor Designation to the 

Current Standard Promote, Limit, or Have No Effect on Capital Formation for 

Businesses? 

Response Count

Greatly promote 2 

Somewhat promote 15

No effect 9 

Somewhat limit 1 

Greatly limit 0 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 44: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Would It Be to Add an Education Standard to the Current Standard?

Response Count

1 (not feasible) 3 

2 1 

3 4 

4 10

5 (extremely feasible) 9 

Source: GAO analysis of structured interviews.

Table 45: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding an Education Standard to the 

Current Standard?

Response Count

1 (not likely) 3 

2 6 

3 6 

4 6 

5 (extremely likely) 6 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 52 GAO-13-640 Accredited Investor

Table 46: Would Adding an Education Standard to the Current Standard Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 2 

Somewhat strengthen 6 

No effect 14

Somewhat weaken 4 

Greatly weaken 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.

Table 47: Would Adding an Education Standard to the Current Standard Promote, 

Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 2 

Somewhat promote 9 

No effect 9 

Somewhat limit 3 

Greatly limit 4 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 48: On a Scale of 1 to 5, Where 1 Is Not Feasible and 5 Is Extremely Feasible, 

How Feasible Would It Be to Add an Opt-in Provision to the Current Standard?

Response Count

1 (not feasible) 7 

2 3 

3 4 

4 5 

5 (extremely feasible) 8 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 53 GAO-13-640 Accredited Investor

Table 49: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding an Opt-in Provision to the Current 

Standard?

Response Count

1 (not likely) 4 

2 2 

3 6 

4 3 

5 (extremely likely) 12

Source: GAO analysis of structured interviews.

Table 50: Would Adding an Opt-in Provision to the Current Standard Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 1 

Somewhat strengthen 2 

No effect 7 

Somewhat weaken 4 

Greatly weaken 13

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 51: Would Adding an Opt-in Provision to the Current Standard Promote, 

Limit, or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 6 

Somewhat promote 7 

No effect 13

Somewhat limit 1 

Greatly limit 0 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 54 GAO-13-640 Accredited Investor

Table 52: This Proposal Would Be a Requirement in Which an Individual’s 

Investments are Managed by a Registered Adviser. On a Scale of 1 to 5, where 1 Is 

Not Feasible and 5 Is Extremely Feasible, How Feasible Would It Be to Add This 

Requirement to the Current Standard As an Alternative to the Current Standard? 

Response Count

1 (not feasible) 2 

2 4 

3 4 

4 5 

5 (extremely feasible) 12

Source: GAO analysis of structured interviews.

Table 53: On a Scale of 1 to 5, Where 1 Is Not Likely and 5 Is Extremely Likely, How 

Likely Is It That the Market Would Accept Adding This Requirement to the Current 

Standard?

Response Count

1 (not likely) 5 

2 1 

3 3 

4 7 

5 (extremely likely) 11

Source: GAO analysis of structured interviews.

Table 54: Would Adding This Requirement to the Current Standard Strengthen, 

Weaken, or Have No Effect on Investor Protection? 

Response Count

Greatly strengthen 5 

Somewhat strengthen 9 

No effect 7 

Somewhat weaken 4 

Greatly weaken 2 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would strengthen, weaken, or have no effect on investor protection. Those that 

responded that a change would strengthen or weaken investor protection were then asked if the 

proposed change would greatly or somewhat strengthen (or weaken) investor protection.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 55 GAO-13-640 Accredited Investor

Table 55: Would Adding this Requirement to the Current Standard Promote, Limit, 

or Have No Effect on Capital Formation for Businesses? 

Response Count

Greatly promote 3 

Somewhat promote 7 

No effect 10

Greatly limit 1 

Somewhat limit 5 

Don’t know 1 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if a proposed change to financial resources criteria, or understanding 

financial risk criteria, would promote, limit, or have no effect on capital formation. Those that 

responded that a change would promote or limit capital formation were then asked if the proposed 

change would greatly or somewhat promote (or limit) capital formation.

Table 56: Which of the Financial Resource Criteria (Income, Net Worth, Investments 

in Securities, or Fixed-Percentage Investment) Is Most Important for Balancing 

Investor Protection and Capital Formation?

Criteria Count

Net worth 9 

Income 1 

Investments in securities 4 

Fixed percent investment 4 

Other 9 

Source: GAO analysis of structured interviews.

Table 57: Assuming the Current Standard Remains the Same, Should Liquid 

Investment Requirement or Fixed-Percentage Be Considered as Additions to The 

Current Standard? 

Response Count

Yes 18

No 7 

Don’t know 2 

Source: GAO analysis of structured interviews.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 56 GAO-13-640 Accredited Investor

Table 58: Which of the Understanding Financial Risk Criteria 

(Licenses/Certification, Investor Sophistication Test, Self-Certification, Education, 

Opt-in Provision, Investments Managed by a Registered Adviser) Best Balance 

Investor Protection and Capital Formation?

Criteria Count

Licenses/certification 3 

Investor sophistication test 2 

Self-certified sophisticated investor designation 4 

Education 1 

Opt-in provision 1 

Managed by registered adviser 7 

Other 9 

Source: GAO analysis of structured interviews.

Table 59: Should Any of the Understanding Financial Risk Criteria 

(licenses/Certification, Investor Sophistication Test, Self-Certification, Education, 

Opt-in Provision, Investments Managed By a Registered Adviser) Be Considered as 

Replacements to the Current Standard?

Response Count

Yes 7 

No 20

Source: GAO analysis of structured interviews.

Table 60: SEC Currently Prohibits General Solicitation and Advertising to Investors. 

But under the JOBS Act, SEC Will Lift the Prohibition Once a Final Rule Is in Place. 

Would Lifting the Prohibition Strengthen, Weaken, or Have No Effect on Investor 

Protection? 

Response Count

Greatly strengthen 0 

Somewhat strengthen 0 

Greatly weaken 7 

Somewhat weaken 8 

No effect 10

Don’t know 1 

Source: GAO analysis of structured interviews.

Notes: Respondents were asked if lifting the prohibition on general solicitation and advertising to 

investors would strengthen, weaken, or have no effect on investor protection. Those that responded 

that a change would strengthen or weaken investor protection were then asked if the proposed 

change would greatly or somewhat strengthen (or weaken) investor protection.
Appendix III: Summary of Results from Our 

Structured Interviews

Page 57 GAO-13-640 Accredited Investor

One respondent said lifting the prohibition would weaken investor protection, but did not know if it 

would greatly or somewhat weaken.

Table 61: Would Lifting the Prohibition Promote, Limit, or Have no Effect on Capital 

Formation? 

Response Count

Greatly promote 10

Somewhat promote 12

Greatly limit 1 

Somewhat limit 0 

No effect 1 

Don’t know 2 

Source: GAO analysis of structured interviews.

Note: Respondents were asked if lifting the prohibition on general solicitation and advertising to 

investors would promote, limit, or have no effect on capital formation. Those that responded that a 

change would promote or limit capital formation were then asked if the proposed change would 

greatly or somewhat promote (or limit) capital formation. One respondent said lifting the prohibition 

would promote capital formation, but did not know if it would greatly or somewhat promote.
Appendix IV: Comments from the Securities 

and Exchange Commission

Page 58 GAO-13-640 Accredited Investor

Appendix IV: Comments from the Securities 

and Exchange Commission
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 59 GAO-13-640 Accredited Investor

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the individual named above, Triana McNeil (Assistant 

Director), Benjamin Bolitzer, Jeremy Conley, William Chatlos, Katherine 

Bittinger Eikel, Elizabeth Jimenez, Jill Lacey, Angela Messenger, Marc 

Molino, Barbara Roesmann, Jessica Sandler, and Weifei Zheng made 

major contributions to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(250685)
The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding decisions. 

GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no 

cost is through GAO’s website (http://www.gao.gov). Each weekday 

afternoon, GAO posts on its website newly released reports, testimony, 

and correspondence. To have GAO e-mail you a list of newly posted 

products, go to http://www.gao.gov and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s website, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537.

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube. 

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. 

Visit GAO on the web at www.gao.gov. 

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-

4400, U.S. Government Accountability Office, 441 G Street NW, Room 

7125, Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations 

Public Affairs 

Please Print on Recycled Paper.