Startup and hedge fund investor pool could shrink under SEC plan

DEC 19, 20157:23 AM

[WASHINGTON] More people could be barred from buying into some of the most sought-after private investments, including hedge funds and shares in high-growth startups, under a recommendation issued Friday by U.S. regulators.

The Securities and Exchange Commission's staff report urges the commission to update rules that specify who can put money into riskier private investments, which are generally sold with less regulatory oversight. The SEC's existing criteria dates to 1982, decades before the boom in Silicon Valley startups such as Uber Technologies fueled by private capital and crowdfunding websites that tout shares in private firms.

The SEC's recommendations, which were issued for public comment, reflect the divide between business groups that want the criteria loosened and consumer advocates who argue the current standards are too loose. Congressional Republicans also have pressured the regulator to allow a greater number of investors to buy into startups before they go public, saying it would broaden the pool of capital and give more people the chance to get rich.

Under current rules, only individuals who earn more than US$200,000 in annual income or have a net worth exceeding US$1 million, excluding their homes, can become accredited investors. Updating that 33-year-old criteria to reflect inflation would mean a cutoff of US$500,000 for annual income or US$2.5 million for net worth. That would reduce the pool of potential investors from about 12 million households to as few as 4.3 million, the SEC wrote.

The agency could prevent that decrease by grandfathering many investors who qualify under today's standards, the report said. It also could increase the number of accredited investors by allowing professionals such as licensed stock brokers or certified public accountants to invest even if they don't meet the income or wealth requirements.

"This report analyses various approaches for modifying the definition of an accredited investor," SEC Chair Mary Jo White said in a statement. "Public input will be very valuable as the commission considers the definition." The SEC could seek formal changes to the investor thresholds by proposing new rules, which would have to be approved by the agency's commissioners. The regulator's staff report didn't outline any timeline for the changes.

BLOOMBERG