Among the regulations governing hedge funds are the restrictions found in Regulation D of the Securities Act of 1933. Those restrictions allow hedge fund investment only from accredited investors who are defined as individuals with a minimum net worth of $1,000,000 or a minimum income of $200,000 in each of the last two years (for a couple, the minimum household income is $300,000 in each of the past two years) and a reasonable expectation of reaching the same level in the current year. In 2010 the Dodd-Frank Wall Street Reform Act (Dodd-Frank) revised the definition by excluding ones primary residence from the net worth amount; however, aside from that revision, the qualifications have remained unchanged for over 30 years. Recently proposals have been introduced to further amend Regulation D.
Allowing for Inflation
Since the qualifying amounts to be an accredited investor have not changed since the 1980s, inflation has made those amounts less significant in terms of filtering out prospective investors and has in fact opened the doors to millions of such investors who now total 8.5 million. If the current amounts were to be adjusted for inflationas per current proposalsit is estimated that the number of Americans who can qualify as accredited investors would drop to 3.75 million.
Heightened Qualified Purchaser Minimums
Under Dodd-Frank, authority was extended to the Securities and Exchange Commission to adjust the net worth and income standards for individuals. While banks and corporate entities must have a minimum of $5,000,000 in total assets, investors in the larger hedge funds must also meet the definition of a qualified purchaser under the Investment Company Act of 1940, which likewise requires individuals to have a minimum of $5,000,000 in investments.
Impact on Startups
The notion of reducing the number of accredited investors comes at a time when American entrepreneurship is just beginning to get a new kick start. Under the JOBS Act, startups are allowed to engage in general solicitation for investors which has resulted in a significant funding boost for hi-tech companies. By changing the definition of an accredited investor, the ranks of eligible investors for these initiatives would be greatly reduced. According to Steven Cinelli, a crowdfunding expert, The accredited investor definition is an anachronism. Trying to morph an old law into the digital generation is an inherent waste of time, and focus should be spent on improving disclosures.
Alternative Thresholds
The exclusionary nature of the current income and net worth tests have prompted some pundits to propose alternative standards relating to level of education or prior experience as an investor. Whether such criteria will serve as legitimate benchmarks to protect the unsophisticated investor is a matter still under review.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI
