The Evolution and Future of the Accredited Investor Standard for Individuals

• Jurisdiction: United States,Federal
• Citation: Vol. 23 No. 6 Pg. 36
• Pages: 36
• Publication year: 2010

Utah Bar JournalVolume 23.

Vol. 23, No. 6, 36. The Evolution and Future of the Accredited Investor Standard for Individuals

Utah Bar Journal
Volume 23 No. 6
Nov/Dec 2010

The Evolution and Future of the Accredited Investor Standard for Individuals

by Michael L. Monson

Since as early as the 1930s, regulators and courts have struggled with how to protect individual investors in private offerings of securities while still allowing sufficient investment in private offerings to sustain the growth of start-up and other young companies - companies which have historically been responsible for much of the job growth in the United States. Eventually, the Securities and Exchange Commission ("SEC") came up with the idea of "accredited investors." Accredited investors are individuals or other entities that have sufficient wealth not to need the protection of federal and state securities laws to the same extent as non-accredited investors.

As the dollar thresholds within the definition of "accredited investor" have not changed to keep up with inflation, the number of individuals who qualify as accredited investors has grown significantly in the last twenty-eight years. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law (the "Dodd-Frank Act"). The Dodd-Frank Act makes an important revision to the definition of "accredited investor" as it applies to individuals. This revision is effective immediately. The Dodd-Frank Act also requires the SEC to review periodically the individual accredited investor standard, in particular with regard to dollar thresholds, but leaves that difficult decision for another day.

This article briefly outlines the history of the accredited investor standard as it applies to individuals, describes important recent changes to that standard, and attempts to summarize the forces that will likely determine future changes to that standard.

History: Where the Accredited Investor Standard Came From

Companies desiring to sell stock, membership interests, or other securities must register with the SEC, find an applicable exemption from registration, or sell them illegally. Registration is very expensive and really only practical for large companies. Selling securities illegally is not an option for informed, law-abiding citizens. However, that does not mean it does not happen, and it may, in fact, be the most frequently-used method of selling securities. Informed, law-abiding, small and midsized companies, therefore, must find an exemption if they want to raise capital through the sale of securities.

Section 4(2) of the Securities Act of 1933, see15 U.S.C. § 77d, (the "1933 Act") exempts from registration "transactions not involving any public offering." Id. Unfortunately, the 1933 Act did not give any clarification on what would constitute a "public offering."

In 1935, general counsel at the SEC articulated, and the courts generally adopted, four critical factors to be considered in determining whether an offering is "public" or "non-public." Securities Act Release No. 33-285, 11 Fed. Reg. 10,952 (Jan. 24, 1935). Generally these four factors were: (i) the number of offerees and their relationship to each other and the issuer, (ii) the number of units offered, (iii) the size of the offering, and (iv) the manner of the offering. See Campbell v. Degenther,97 F. Supp. 975, 977 (W.D. Penn. 1951). Despite these factors, attorneys had a hard time advising their issuer clients that any particular offering did indeed fit within the four factors because it was...