The SEC may change the definition of Accredited Investor . . . again.

You know why I love having blog readers from so many different industries?

Because they notice things I miss.

One of my super sleuths sent me an email in late December about a report commissioned by the SEC which reviewed the definition of Accredited Investor.  And that report, which you can read for yourself here, has change written all over it.  But will it help the Broadway Producer  . . . or hurt?

Before we get into that, let me back up, in case you’re wondering, “What the heck is an Accredited Investor and why should I care?”

First, to read the definition of Accredited Investor, click here . . . but in layman’s and laywoman’s terms . . . it means “rich person” (anyone with a net worth of over $1mm).

Second, 99% of all Broadway Investments are available ONLY to Accredited Investors (Godspell was an exception).

Now I’m sure you can see why if that definition changes, how it would massively impact how Broadway Producers do business.

So what’s the SEC up to?

It all has to do with the financial crisis.

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it included a provision to re-examine the definition of Accredited Investors every four years.  And, well, it’s that time.  (When Dodd-Frank passed initially, there was a major change to the definition of Accredited Investor – when an individual’s home was excluded from the calculation of net worth – and instantly so many people were dropped from the category.)

And can you blame them?  $1mm is not what it was ten years ago, never mind twenty years ago.  And since the SEC’s job is to protect the small investor, it just may be time to make some modifications to that definition.

Yeah, that’s right, I said that . . . even though raising that $1mm threshold or modifying it might cost Broadway potential investors.

But that’s not my only suggestion . . . and luckily, the SEC beat me to it!

Rather than read that entire report, let me tell you what the SEC has recommended that affects us:

  • Leave the current income and net worth thresholds in place, subject to investment limitations.
  • Create new, additional inflation-adjusted income and net worth thresholds that are not subject to investment limitations.
  • Index all financial thresholds for inflation on a going-forward basis.
  • Permit spousal equivalents to pool their finances for purposes of qualifying as Accredited Investors.
  • Grandfather issuers’ existing investors that are Accredited Investors under the current definition with respect to future offerings of their securities.

What this means is that they DO want to raise that $1mm net worth threshold to make sense in terms of today’s dollars (and on a rolling basis) . . . but they are willing to allow those people who currently qualify to continue to invest, subject to limitations (not unlike what they are doing with the JOBS Act).

In a sense they are advocating two levels of investors . . . “rich person” and “really rich person.”

This WILL slightly restrict investors who want to get in to our game . . . so why am I not asking you to write to the SEC right now?  Well, first, it makes sense. I can’t argue with things that make sense even if it makes my job a little harder.  The $1mm figure was set in 1982.

And second, the SEC is also recommending some other ways for investors to qualify.  And they are:

  • Permit individuals with a minimum amount of investments to qualify as Accredited Investors.
  • Permit individuals with certain professional credentials to qualify as Accredited Investors.
  • Permit individuals with experience investing in exempt offerings to qualify as Accredited Investors.
  • Permit individuals who pass an Accredited Investor examination to qualify as Accredited Investors.

Now we’re talking . . . so all of a sudden even if you don’t have the assets, but have the knowledge to make an educated decision (and not risk more than you have), you’d be able to qualify.  This could actually EXPAND the Broadway Investor pool if enacted.

And this makes even more sense than raising the $1mm threshold.

While I understand the reasoning behind restricting some investors from certain offerings, it has always driven me crazy that in this country, you can take every penny you have, drive to any casino (which you probably have within 1.5 hours of your home) and risk it all . . . and all that you need to show is your ID.  But, you can’t take even a portion of that life savings and invest it in a small business or what you think might be the next Uber.  Nope, that’s not for you.  That’s only for the really rich.  But please, go buy as many Powerball tickets as you can.  Because that’s a smarter investment.

The definition of Accredited Investor should change.  Create a higher threshold sure, but also allow more people to qualify.  That’s how you inject more capital into small businesses all over America, including Broadway and Off Broadway.

Stay tuned . . . I’ll report back if I need you to start writing letters.

 

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Comments
  • "Super Sleuth" says:

    As the SEC report points out, the inflation adjusted thresholds would be more than double the existing levels so I’m glad they are considering the investment limited category. The proposed investment limitations make perfect sense in terms of protecting “borderline” accredited investors from investing more than they can afford but it will be fascinating to watch how these restrictions apply in practice if the SEC goes down this route. The main question I would have is whether the SEC attempts to apply these limits in aggregate or to individual investments.

    Aggregate limits seem more in line with the desire to protect people from investing more than they can afford, despite credibility to the argument that diversification makes the total investment less risky than the sum of the individual investments. An aggregate limit however, assuming it applies on a calendar year basis, may add another complicating factor to the timing of when you attempt a raise… and would be almost impossible for an issuer to verify eligibility.

    There’s definitely a lot of interesting ideas here… but, like always, the devil will be in the details.

    (As a side note, I’d question whether the Grandfather clause is particularly relevant to Broadway given that the Grandfathering is to existing LLP/C’s and not existing investors… i.e. just because you’re an existing Broadway investor, doesn’t mean you’re allowed to invest in a new production LLP/C if you no longer meet the criteria… you’d only be covered if one of the existing LLP/Cs you had an investment with was raising more money.)

  • Adina Aaron says:

    Could you form an accredited LLC and pool the unaccredited investors in that LLC, paying them in shares of that company.

  • Rick says:

    Wow!…Very informative I will definitely add a great financial consultant to my repertoire of team members…Thanks Ken!!

  • Henry says:

    I agree with you wholeheartedly, Ken, on the idea of why is it okay for me to take every penny I have in the bank and buy Powerball tickets, but, if my wife and I (two educated, intelligent adults), understanding the risk involved, wanted to take a portion of saved money to invest in a show but were not, BY LAW, allowed to just doesn’t sit well in my gut. America – the land of opportunity? Not sure. And the more I read and hear about this, the more cynical I become. It actually makes me angry!
    Thank you for sharing the information and engaging us in the conversation. I sincerely appreciate that!

  • Gene Massey says:

    The accredited rule is unconstitutional. You mean they discriminate against POOR PEOPLE?
    Seems like a violation of my constitutional rights to be treated equally in all things.

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