January 3, 2007
January 3, 2007
In File Number S7-25-06, the Commission rightly solicits comment concerning the existing and proposed standards for investor accreditation. Specifically, the Commission writes, "We solicit comment on whether retaining the existing definition of accredited investor as it relates to natural persons and adding an additional requirement for that term that uses the amount and type of a natural person's investments (indvidually, or jointly with the person's spouse) is an appropriate standard by which to measure whether that person is likely to have sufficient knowledge and financial sophistication to evaluate the merits of a prospective investment in a private investment vehicle and to bear the economic risk of such an investment."
In response, I submit that the use of a specified dollar amount of income, net worth, or total investments is not an appropriate standard for determining investor sophistication. For example, while a lottery winner or recent inheritor might meet the objective net worth requirements for investor accreditation, it is quite probable that such an individual is not likely to have sufficient knowledge and financial sophistication to evaluate the merits of a prospective investment in a private investment vehicle. Conversely, a student pursuing a MBA, or an investment industry professional, might very likely fail to meet the objective net worth requirements for investor accreditation even though that person's academic and/or professional background clearly suggests that he or she is likely to have sufficient knowledge and financial sophistication to evaluate the merits of a prospective investment in a private investment vehicle.
Having suggested that the use of a specified dollar amount of income, net worth, or total investments is not an appropriate standard for determining investor sophistication, I propose that the Commission consider adopting an alternative means for determining whether a person is likely to have sufficient knowledge and financial sophistication to evaluate the merits of a prospective investment in a private investment vehicle. Specifically, I believe that the Commission should utilize internet technology and the SEC website, www.sec.gov, to create an objective test to determine investor sophistication. The use of such an exam would better ensure that the spirit of the Commission's intent in requiring investor accreditation is achieved by 1) allowing potential investors to demonstrate their sophistication even if such potential investors are not (yet) wealthy, and 2) preventing wealthy potential investors from investing in private investments for which such wealthy investors are not sophisticated enough to evaluate.
I sincerely hope the Commission will thoroughly consider amending its standard for determining investor sophistication by utilizing a means for determination that relates not to how much wealth a potential investor already has, but rather to how well a potential investor is able to evaluate private investments. Such an amendment will allow investors to better pursue achieving the very amount of investments threshold that the Commission presently proposes investors already have before being allowed to invest.