SEC proposes upping accreditation threshold

A new $2.5m wealth threshold for investment in private equity and hedge funds would dramatically reduce the number of US investors considered accredited.

The US Securities and Exchange Commission voted yesterday to propose a rule to raise threshold requirements to shrink the pool of accredited investors who may invest in private equity and hedge funds.

The new rule redefines accredited private equity and hedge fund investors as those who own $2.5 million in assets, excluding a personal residence, as well as have a personal income of at least $200,000 for at least two years running. According to the wording of the rule’s text, which has not yet been released, the rule would not apply to venture capital funds.

The rule is being changed in large part to cut down the potential for fraud by lightly regulated, smaller private equity and hedge funds. “We’re taking steps to modernise the standard so it will be abundantly clear that these investments are not for mom and pop, unless mom and pop are very sophisticated investors,” SEC Chairman Christopher Cox told reporters.

According to SEC Commissioner Paul Atkins, the new rule would reduce the number of qualified investors by as much as 88 percent. When the old standard was introduced in 1982, it included only a requirement of $1 million in net worth or a personal income of $200,000; at that time, 1.87 percent of households met the requirements, compared to 8.5 percent today. The rule change could reduce the current percentage to 1.29 percent of households.

Comments on this proposal will be received by the SEC within 60 days of its publication in the Federal Register.