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SEC expands definition of who can be accredited investor for private offerings

Michael Lane is chairman of the Long Island

Michael Lane is chairman of the Long Island Capital Alliance (LICA), which holds regional capital forums for investors and companies. Credit: Patrick E. McCarthy

The Securities and Exchange Commission has made a key rule change that expands the definition of who qualifies as an accredited investor for private offerings.

The rule change looks beyond just income thresholds and takes into account other measures of financial sophistication, adding new categories of individuals that could qualify as accredited investors including knowledgeable employees of private funds and those holding certain professional certifications.

Still, regional experts are uncertain whether it will have a significant impact for startups locally.

"It does create a broader market, but I think generally speaking it’s too early to tell what the impact of this will be on Long Island," says Michael Lane, chairman of the Long Island Capital Alliance (LICA), which holds regional capital forums for investors and companies.

He said taking into account an individual’s financial sophistication in addition to wealth is a positive, noting wealth "doesn’t necessarily establish financial sophistication or expertise."

Lane is also chief executive of Huntington-based SteriLux Systems, a health care company that developed a sterilization locker for garments and personal items, which has raised almost $1-million from investors since last summer and is now seeking another round of capital.

"I think this could be a good thing," he says.

Old wealth/income threshold

Previously, to be an accredited investor a certain wealth/income threshold needed to be met (ie., an annual income of at least $200,000 ($300G with a spouse) or a net worth of at least $1-million, excluding a home value, says Neil Kaufman, managing partner at Hauppauge-based Kaufman & Associates LLC, which advises clients on private placements and SEC filings.

Kaufman, LICA chairman emeritus and an accredited investor, believes the rule change had the potential to dramatically increase the pool of available accredited investors, but falls short because it didn’t include among eligible individuals’ other categories like certified public accountants, attorneys and MBA’s.

It does include holders in good standing of the Series 7, Series 65 and Series 82 licenses, which includes stockbrokers, he says.

The SEC said the changes provide the commission "with flexibility to re-evaluate or add certifications, designations, or credentials in the future."

The SEC estimates 700,000-plus individuals hold the designations/certifications listed in the rule change, but it’s unclear how many of those already qualified as accredited investors.

The rule also adds other entities like limited liability companies with $5 million in assets and certain family offices, but the SEC was unable to provide exact figures on the total number of newly eligible accredited investors this could add to the existing pool.

"A large number could already be accredited investors," says Michael Faltischek, a founding partner at Ruskin Moscou Faltischek PC in Uniondale and past board chairman of the Long Island Angel Network.

He also noted that individuals that hold licenses outlined in the rule "may know the rules around buying and selling securities," but may not know about the angel investment industry itself.

Investors don't just bring money

Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, similarly said, "There will be more people, but the question is what percentage of those people will be knowledgeable of angel investing."

As a startup you don’t want just any capital, you "want the right kind of money," he says. Consider, angels traditionally bring an added-value feature beyond just money (ie., experience, connections), he said.

If the rule change brings more people that understand the pros and cons of angel investing that’s a positive, but if it doesn’t, that could "disrupt the market if these new investors don’t fully understand the risk and illiquidity inherent in angel investing," says Sohl.

It could take 10 to 12 years before an investor sees any liquidity from a seed investment with the potential of no return on investment, says Bob Brill, an accredited investor and LIAN board member.

Given that "you’ve got to be reasonably wealthy to participate in private placement offerings," says Faltischek, also an accredited investor. "If you don’t have at least $1 million in net worth, presumably disposable, you should not be looking at an early stage high-risk kind of business venture."

Brill, a co-founder of Qunnect, a quantum communications device company, which has raised over $800,000 in angel funds since last year and over $2 million in government funding, believes the rule change "will help a little bit, but not a lot."

For a company like Qunnect not so much because they require a minimum of $25,000 from investors.

"It doesn’t hurt, but I don’t think these changes make a lot of difference," says Brill.

Fast Fact:

Under the previous net worth and income requirements, the SEC estimates that 16 million U.S. households (or 13%) qualified as accredited investors. This estimate does not, however, identify the precise number of accredited investors that do or could invest in the Regulation D market or in other exempt offerings.


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