A post on DealBook pointed me to a recent SEC release I missed over the holidays. The proposed rules contained in the release “are designed to provide additional investor protections” with respect to hedge funds. The proposed rules include amendments to Regulation D that change the definition of accredited investor to be applied to a natural person with respect to an investment in a â€œprivate investment vehicle,â€ i.e., hedge fund. Under the proposal, for a natural person hedge fund investor to be considered accredited (what the release refers to as an â€œaccredited natural personâ€), he or she would need to meet the existing definition of accredited investor under Rule 501(a)(5) or (6) (i.e., net worth of at least $1,000,000, annual income of at least $200,000, or joint annual income of at least $300,000) and own at least $2.5 million in investments. Note that it appears a hedge fund would still be able to take money from up to 35 non-accredited investors as allowed under Rule 506 provided it furnishes them the requisite disclosure and believes the investors are sophisticated (although, it seems highly unlikely that a hedge fund would bother with non-accredited investors (many funds have seven-figure minimum investment requirements), and I would view it as a red flag if it did (it can’t attract the smart money)).
I have not studied the release in depth, but one interesting thing of note is that the proposal provides that the $2.5 million threshold will be adjusted every five years for inflation, which is not the case for the $1,000,000/$200,000/$300,000 thresholds referenced above. These thresholds, as the release notes, have remained unchanged since the SEC established them in 1982. Putting aside â€œnanny stateâ€ criticisms referenced in the DealBook post, it strikes me as curious that the SEC would include an inflation adjuster in this new threshold yet say nothing about adding one for the old thresholds. Maybe it has something in the works.