About Accredited Investors
Few people seem to understand the origin and intent of the SEC rule that formed the accredited investors class.
Basic securities law requires that all securities register with the SEC at the time they are first issued. There is a statutory exemption from registration for “transactions by an issuer not involving any public offering”.
The US Supreme Court chimed in with a ruling in a case involving Ralston Purina. The company was selling its own stock to its senior executives and insiders. The Court held that these insiders were fully aware of the company’s operations. They did not need the information that would come with a registration statement.
The SEC introduced the concept of accredited investors for the private securities market in 1982. Then as now, institutions represent the lion’s share of the funds that come into this market. Large institutions do not need the protection of a registration statement. Institutions are capable of doing their own due diligence.
The SEC left room for individual investors who were wealthier, The SEC did not presume that wealthier investors were necessarily better qualified to evaluate these offerings, but rather that they could better afford to hire people to evaluate the offerings for them.
In the 1980s and 1990’s a cottage industry of lawyers and CPA’s acted as Investor Representatives. They would evaluate each offering and conduct appropriate due diligence. By the end of the 1990s this function was almost always was performed by mainstream stockbrokers or specialists that they hired.
Graham Dodd required the SEC staff to review the definition of accredited investor every 5 years, Every time the staff reviews this rule a small group of people clamor that it needs to be expanded so that more, less experienced investors can take the risk.
That is unlikely to happen as long as the staff believes that most investors still need the disclosures that would come with a registration statement. As a result, the pool of accredited investors swill remain small.
