• Subscribe
  • Contact Us
  • About LendIt Fintech News
  • Home
  • Menu Item
  • Menu Item
  • Menu Item
  • Menu Item

Lend Academy

LendIt Fintech News: Daily Coverage of Fintech & Online Lending


  • Editorial
  • Daily News
  • Podcast
  • Investor Forum
  • Events

SEC Committee Discusses Changes to Accredited Investor Definition

July 11, 2014 By Peter Renton 15 Comments

Views: 51

SEC Accredited Investor Change

Yesterday the Investor Advisory Committee of the Securities and Exchange Commission (SEC) met to discuss, among other things, updating the definition of an accredited investor. To be an accredited investor today a person must have an annual income of $200,000 or more for each of the past two years or a net worth (excluding a primary residence) in excess of $1 million.

The issue is that this definition was created several decades ago and has never been adjusted for inflation. So, some people believe it should be updated. If this happens, it could have a profound affect on this industry. Pretty much every investment option outside of Lending Club and Prosper is limited to accredited investors only. Any change to this definition that reduces the available pool of investors could be very damaging to some of the platforms and funds in our industry.

I reached out to several industry leaders to get their take on this new development. I wanted to see if everyone agreed with me that this could become a big problem. Here is what Jilliene Helman, CEO of Realty Mogul, a real estate marketplace for accredited investors, had to say:

It would be a shame to see the definition of an accredited investor become even more onerous.  The JOBS act was meant to open up the private markets for investors, and adjusting the income or net worth requirements for accredited investors upward would serve the opposite purpose.

It’s incredibly important that investors are protected – and a core focus of ours at Realty Mogul, but what we’ve found is that the majority of our investors are highly sophisticated.  I’d hate to see those investors lose out on the opportunity to invest in private markets if income requirements are increased by the SEC.

David Klein is the CEO of CommonBond, a student loan platform connecting borrowers with accredited investors and he had a slightly different take:

The rule was set over 30 years ago and hasn’t been redefined to account for inflation. From a purely economic perspective, the rule is begging to be changed, to the extent regulators want to maintain the same intent. As it relates to the effect on our industry, I think the idea of ‘accredited investor’ has the potential to become less important over time, regardless of definition, if legislation continues to go down the path that the JOBS Act has started to pave.

I can see a world in which finance is further democratized, giving more control to the individual investor. The JOBS Act provided a relatively limited capacity for individuals who wanted to be equity investors; I can see that capacity expanding over time as well as including individuals who want to be debt investors or lenders. That would open up the industry even further.

Brendan Ross is the president of Direct Lending Investments and he runs a high yield small business loan fund open to accredited investors. He provides us with the bigger picture here:

The US has 117 million households of which 7.4% are accredited under the income and net worth tests.  Virtually every innovation in capitalism starts with private placements sold to these investors.  Innovation then trickles down to the masses as creative financial entrepreneurs figure out how to stick the assets into a mutual fund.  P2P actually stands alone as a financial innovation that started with retail investors, but that changed in 2011 when institutional investors discovered P2P.  Since then, not a single new platform has been available to unaccredited investors.  If the SEC were to meddle with the accredited investor definition, they could break the delicate equation that governs financial innovation.  No one wants that.

Ethan Senturia is CEO of DealStruck, a small business lending platform open to accredited investors. He doesn’t see much immediate impact if there is a rule change here:

As we’ve seen from the P2P market over the past couple of years, a restriction on accredited investors likely won’t have much of an initial impact on the industry, as institutions have become the largest providers of capital to P2P lending platforms. As the market evolves, however, a core premise of P2P is not only the democratization of access to capital, but the democratization of access to capital markets. Restricting the ability of individual investors to participate even further than under existing standards forces them to invest through some of the exact institutions that failed them during the crisis and that P2P was established to circumvent.

What has not been mentioned here is the reason behind the accredited investor rule. The rule has been put in place with the assumption that people with a high net worth are somehow able to make better financial decisions than the general public. This may be true in many instances but some of the most financially savvy people I have ever met have been non-accredited investors and I have certainly met some wealthy people who were pretty clueless when it came to money management.

Of course, doing some kind of means test for investors would be very difficult and expensive to implement. But banning everyone below these high thresholds also seems wrong to me. And increasing these thresholds will do virtually nothing to further protect investors. I certainly hope they leave the definition unchanged.

If you are interested in learning more the SEC Investor Advisory Committee meeting was covered in more depth by Think Advisor.

Filed Under: Peer to Peer Lending Tagged With: accredited investors, sec

Views: 51

Comments

  1. RawRaw says

    July 11, 2014 at 1:18 pm

    I think the side note is also if you are an accredited investor, you can suffer a larger stupid mistake.

    Reply
  2. Anil @ PeerCube says

    July 11, 2014 at 2:16 pm

    I believe raising the threshold for accredited investors will be a blow to online lending/equity marketplaces and p2p lending. This will severely slow down the growth.

    Since SEC is no longer approving LC/Prosper type deals and suggesting marketplaces take JOBS route while JOBS is still in flux, the pool of investors will shrink for most lending/equity marketplaces. The profitability for marketplaces that depend on institutions only will be hard to come by as institutions, due to their size, demand special deals/discounts that marketplaces don’t extend to accredited investors/retail investors.

    Reply
    • Prescott says

      July 11, 2014 at 6:43 pm

      Anil, can you expand on “SEC is no longer approving LC/Prosper type deals” is that true? do you have sources? This would be a huge advantage to LC/Prosper – their competitors will need to find a way around that.

      Reply
      • Anil @ PeerCube says

        July 11, 2014 at 10:54 pm

        Prescott, Yep, LC and Prosper now have duopoly on non-accredited retail investors. My information is based on my conversations with a few people involved in securities laws and peer to peer lending at LendIt conference. Also, Daric filing to SEC didn’t receive the approval yet seems to confirm what I heard at the conference.

        Reply
        • Peter Renton says

          July 12, 2014 at 6:08 am

          I have heard some discussion like this from others as well but I wouldn’t read anything into the pending status of Daric’s S-1. Their filing was not put together well and I believe if a company truly wanted to do an S-1 filing and allow non-accredited investors the SEC would approve them if they have all the proper pieces in place.

          The difference is that no platforms I have spoken with, Daric included, really want to go through the additional work and scrutiny of being a quasi-public company to allow non-accredited investors.

          Reply
    • Andrew N says

      July 11, 2014 at 8:03 pm

      I’m under the impression that if you want to invest somewhere that you can just click the box saying you’re accredited and not provide any verification beyond that. I have a friend (of course not me, I would never tell a lie) who has lied about being accredited on several crowdfunding sites, including Lending Club…

      Has that changed?

      Reply
      • Prescott says

        July 11, 2014 at 8:38 pm

        Andrew – that hasn’t fully changed. They are recommending that possibly the platforms will need to do more than just take the investors word for it. We’ll see how it plays out. Probably won’t do much for someone whose already invested too much, they’ll likely just have to draw down, or can’t invest until they drop back down.

        But even then, there are lots of ways to skirt proof… I’ve heard..

        Reply
      • Peter Renton says

        July 12, 2014 at 6:11 am

        Andrew, It has actually changed for some investments. Anyone who does general solicitation of their investment must now go through an accredited investor verification process. This is much different than just checking the box – it is a somewhat onerous process that makes it very difficult for any investor to be approved unless they are truly accredited.

        But if a company is not doing general solicitation, as in not promoting their offering to the public, then the same self-verification applies.

        Reply
  3. rawraw says

    July 11, 2014 at 3:32 pm

    Yea I agree and hate being regulated out of certain investments, given my time in wealth management I realized how less-than-sophisticated lots of high net worth clients are.

    Reply
    • JJ Hendricks says

      July 16, 2014 at 1:21 pm

      I agree. The whole premise of ‘accredited investor’ is ridiculous to me. It assumes people with lots of assets or income are inherently better investors and can make wise financial decisions. There are lots of “rich” people who are horrible with money and lots of “poor” people who are smart with it. Assets or income are a very poor proxy for investment savvy.

      Reply
  4. Prescott says

    July 11, 2014 at 6:41 pm

    I read through a bunch of the links, I couldn’t find a reference to changing the definition of accredited investor, only a tightening of the rules, to disallow ambiguity. I.E. 5% or 10% of what? Income or Net Worth – right now it’s a bit ambiguous by the committees reading.

    The two biggest drivers I see in those notes are the idea that maybe an investor self disclosing they are an accredited investor might not be enough – this will be a pain for platforms to have to do the due diligence on everyone themselves.

    Additionally, the idea that the caps mentioned above might need to be coordinated across the whole ecosystem is interesting. They seemed to recognize that this is likely burdensome and will kill innovation. I think for this to happen, they’ll need a regulatory system to mange it – which would be weird, a central system that has user information, total investment dollars, etc – would be a gold mine for data people – and usually this doesn’t go over with these types of investors.

    Reply
  5. Tyrel Haveman says

    July 17, 2014 at 2:03 pm

    Often the returns on investments available to accredited investors only are much higher than returns available to the general public. What this means it that if someone who is not an accredited investor wishes to increase their wealth, they are not able to access the investments that would best allow them to do this, while those who are already wealthy may access these investments. This can only serve to increase the income gap, and thus I would conclude that there should be no limit at all.

    Reply
  6. Lariat says

    July 24, 2014 at 2:34 pm

    If someone is currently an accredited investor, would they be “grandfathered in” under any new rules/qualifications, or would they have the accredited designation taken away from them?

    Reply
    • Peter Renton says

      July 25, 2014 at 11:53 am

      Lariat, That is a good question. I expect that any change here for investors will only apply to new investments. They would find it very difficult to enforce any unwinding of existing investments. But you may not be able to add to any existing investments if the new rule means you are no longer accredited. That would be my expectation.

      Reply

Trackbacks

  1. A Short History of Accredited Investors and What Comes Next - Lend Academy says:
    February 13, 2020 at 7:37 am

    […] Back in 2014 the Investor Advisory Committee of the SEC met to discuss, among other things, updating the definition of an accredited investor. In late 2015 the SEC released this 118-page report reviewing the […]

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Investor Intelligence

Peter Renton's Returns

Investor Forum

Lending Club Review

Prosper Review

Investor Resources

Most Popular Editorials

The Pure Marketplace Lending Model is Dead, the Hybrid Takes its Place

The 2018 Lending Club and Prosper Tax Guide

My Returns at Lending Club and Prosper

Map of Available States for Lending Club and Prosper Investors

Banks and Marketplace Lending Platforms: Ideal Partners?

Subscribe to the Podcast

Subscribe to the Lend Academy Podcast on iTunes
Subscribe to the Lend Academy Podcast
List of Podcast Episodes

Archives

Follow @LendAcademy Follow @LendIt

ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

Recent Editorials

  • Top 10 Fintech News Stories for the Week Ending January 16, 2021
  • Podcast 281: Sean De Clercq of Kickfurther
  • Upgrade Launches a Rewards Checking Account
  • Affirm’s IPO Takes Off Like a Rocket Ship
  • Fintech Lenders and Banks Are Ready for PPP Round Two

Copyright © 2021 · Metro Pro Theme on Genesis Framework · WordPress · Log in