Thursday, September 6, 2012

The Incredible Shrinking Accredited Investor Status

Is it time for the SEC to consider adjusting the thresholds for individual accredited investor status?

The term "accredited investor" is defined in Rule 501(a) of Regulation D.  Status as an accredited investor is important because companies that issue securities to accredited investors may be able to qualify for one or more exemptions from registration and disclosure requirements under the securities laws.  Under Rule 501(a), an investor who is a natural person may qualify as an accredited investor if the investor has either:
(1) an individual net worth, or joint net worth with that person's spouse, in excess of $1,000,000, excluding the value of any equity in their primary residence; or
(2) individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

Regulation D was adopted in March of 1982.  For context, that's also the year Eddie Murphy made his film debut in 48 Hrs.  The $1,000,000 and $200,000/$300,000 thresholds have not changed since then.  Adjusted for 30 years of inflation to today, the thresholds for individual accredited investor status would now be $2,424,381 for net worth, $484,876 for individual income, and $727,314 for joint income with the investor's spouse.  That's based on my calculations from the U.S. Department of Labor Bureau of Labor Statistics' Consumer Price Index for All Urban Consumers from March 1982 to July 2012 available here.

Or to flip that analysis around, the $1 million net worth requirement today would have been the equivalent of a $412,476 net worth requirement in 1982.  As Seinfeld's George Costanza might say, that is significant shrinkage!

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