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1 [1] (August 1, 2019)

handle is hein.crs/govbapu0001 and id is 1 raw text is: S Congressional Research Sevice I~nforrmingthe legisiatie debate since 1914 August 1, 2019 Accredited Investor Definition and Private Securities Markets Companies turn to capital markets to raise funding from investors, a process referred to as a securities offering. Public securities offerings are open to a wide range of investors and must meet comprehensive registration requirements imposed by the Securities and Exchange Commission (SEC). By contrast, private securities offerings are exempt from certain SEC registration requirements and are generally available only to accredited investors. Hence, the accredited investor definition effectively determines who can access the private securities markets and invest in privately held companies or offerings by private funds, such as hedge funds, venture capital, and private equity. Private Securities Offerings: Market Size, Risks, and Trade-offs The scope of the accredited investor definition has taken on greater significance in light of recent increases in the volume of private securities offerings. In 2018, companies raised roughly $2.9 trillion through private offerings-more than double the size of public offerings (Figure 1). Figure I. New Capital Raised in Public and Private Securities Markets, 2009-2018 Source:ScrtExhne Comsin thani puliOfferings .. So Pteerivate dferiegso private offerings' reduced disclosure relative to public offerings. Without more comprehensive disclosure, investors in private offerings may be less able to make informed decisions regarding risks and pricing. In addition, private offerings are generally issued by small, medium- sized, and start-up companies, which tend to be riskier investments compared with more established publicly traded companies. Private offerings are also less liquid than public offerings, meaning that investors may have more difficulty selling these securities at desired prices and could incur losses if they are forced to sell to meet urgent cash needs. In regulating capital markets, the SEC must balance two of its statutory mandates: investor protection and capital formation. Through the exemptions for private offerings, the SEC allows companies to raise capital without incurring the costs associated with the registration and disclosure requirements governing public offerings, while ensuring that the investors who participate in such private offerings have sufficient sophistication to take care of themselves without the protections afforded by securities law requirements. Capital formation needs may be better met if issuers can raise funds without incurring registration costs, but investor protection challenges potentially increase as more investors gain access to private offerings. The Current Accredited Investor Definition Under the SEC regulations, an individual must meet one of two criteria to qualify as an accredited investor (Figure 2). Figure 2. Who Is an Accredited Investor? Net Worthexed Inome exceeds U SnK $200K $300K $dLidual Jhit Ii:C at2 1e A} f a 2Na Source: Financial Industry Regulatory Authority. An individual can qualify as an accredited investor if (1) he or she earned more than $200,000 (or $300,000 together with a spouse) in annual gross income during each of the prior two years and can reasonably be expected to earn a gross income above that threshold in the current year or (2) he or she has a net worth of more than $1 million (either alone or together with a spouse), excluding the value of the primary residence. Institutions can also qualify as accredited investors if they own more than $5 million in assets. Moreover, a number of regulated entities, such as banks, insurance companies, and registered investment companies, automatically qualify as accredited investors. According to the SEC, an estimated 13% of all U.S. households (16 million in total) qualified as accredited investors in 2016, up from 10% in 2013, as stated in a separate SEC study. https://crsreportscongress.gov

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