For most Floridians, as the calendar turns to December, the letters S-E-C tend to elicit thoughts of a certain Championship Game to be played at the Georgia Dome in Atlanta. However, drowning out the bellows of the Gators and the chants of "Roll Tide" this week are the words of Chairwoman Mary Jo White of the Securities and Exchange Commission—"[the SEC] is engaged in a comprehensive review of the 'accredited investor' definition."

Indeed, Chairwoman White explained that the SEC will move ahead "relatively soon" in its review of rules governing who qualifies as an accredited investor for purposes of investing in unregistered securities. While unaccredited investors can invest in unregistered offerings, issuers have substantially greater disclosure obligations with respect to such investors and the number of unaccredited investors that can participate in an unregistered offering is limited. Chairwoman White's statements came in an appearance before the House Financial Services Committee on November 18, 2015, in which Chairwoman White stated that a staff study of the accredited investor standard would be released in the next three to four months, and the findings of which could provide the foundation for rulemaking.

The "accredited investor" standard establishes net worth and income levels necessary to qualify individuals as a sophisticated investor who can participate in private placement offerings.  To qualify as an accredited investor under today's standards, an individual must meet one of the three following criteria:

  1. Have had an individual annual income of $200,000 for the past two years with an expectation that it will continue;
  2. Have had a household annual income of $300,000 for the past two years with an expectation that it will continue; or
  3. Have a net worth of at least $1 million, excluding a primary residence.

These financial levels have not been adjusted in over 30 years, and the only notable change in the standard occurred in 2010 by amending the rule to exclude the value of an individual's primary residence in calculating the requisite level of net worth. Thus, inflation has steadily eroded the original import of these financial benchmarks, allowing millions more people over the years to join the ranks of "accredited investors." Nonetheless, critics continue to fault the criteria for needing to allow more people to invest in start-up ventures. Chairwoman White acknowledged these pundits, remarking "[c]learly what we're looking at beyond the test of net worth and income are other kinds of sophistication, experience, qualifications that certainly many, many would argue should entitle you to be an accredited investor. . . One wants to be sophisticated about and realistic about what those other criteria are that would meet investor protection concerns. We're looking quite broadly."

In that respect, the SEC Investor Advisory Committee, an advisory group established by Dodd-Frank to represent retail investors to the SEC, has previously asserted that relying on income and net-worth thresholds "oversimplifies the factors that determine whether an individual truly has the wealth and liquidity to shoulder the potential risks of private offerings." To be sure, proponents of this viewpoint believe that the SEC should scrap the income and net worth floors and instead espouse a definition of sophisticated investor that takes into account an individual's education; professional credentials, such as chartered financial analyst designation or Series 7 license; and investment experience. In short, they echo the very sentiments of Chairwoman White that "[w]e need to look more broadly and try to get away from the notion that the government's assumptions about people's capabilities and abilities should trump people's individual determinations about how to invest."

However, changing the standard for determining who qualifies as "sophisticated investors," could have drastic repercussions in the marketplace for startups, real estate limited partnerships and other investments that are not traded on exchanges. Should Chairwoman White and the SEC champion a "sophistication" requirement it would inject a potentially chilling level of uncertainty into a marketplace of unregistered securities offerings totaling more than $2 trillion during 2014. Changes in the definition will incentive currently accredited individuals, who either become unaccredited through new rules or perceive a subjective shadow of doubt cast over their prior, clearly accredited status, to direct their capital to other investments such as real estate, public stock offerings and high risk bonds instead of private placements, including those for start-up companies, limiting entrepreneurs' sources of capital and their job creating abilities.

Ultimately, the Securities and Exchange Commission is an SEC wielding far more power than the perennial college football powerhouses of the celebrated, Southeastern Conference. That is why the outcome of Chairwoman White's and the SEC's review will have lasting implications dwarfing those stemming from the outcome of Saturday's game, and any accreditation either the Gators or Crimson Tide receive.

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