On December 18, 2019, the SEC voted to propose amendments to the definition of accredited investor, potentially vastly changing suitability criteria for investors. This change could have a significant impact both on investors who may gain access to a now-expanded range of private placements and on the viability of damages claims for sales practices abuses related to private placements.
One of the main criteria that would be changed in the proposed amendments is net worth. The proposals would expand eligibility to individuals with professional knowledge, experience, or certifications. Expanded eligibility criteria was also proposed for institutional investors.
SEC Chairman Jay Clayton said the following with regard to the proposal:
The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.
Changing eligibility criteria is a controversial subject. Some analysts note that net worth is not necessarily an accurate predictor of investment savvy or financial literacy, and that barring investors who fail to meet a specific net worth requirement could be viewed as punitive, unnecessary, and restrictive of their access to potentially higher yield investments in the current low interest rate environment. Conversely, other experts argue that increased eligibility could hurt unsophisticated investors by exposing them to risky private placements and increasing rates of sales practice abuse.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud related to private placements. If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.