$2.5M "Accredited Natural Person" Proposal Out

Date: Thursday, January 4, 2007
Author: HFN Daily Report

An unpopular SEC proposal that, if passed, would require a hedge fund investor to have $2.5 million or more in investable wealth has been unveiled.

The "accredited natural person" proposed requirement popped up on the SEC Web site Wed., Dec. 27, during the slow-going holiday week. Its appearance formalized a unanimous five-member commission agreement on Dec. 13 to propose an investment requirement higher than the $1 million accredited investor standard for the asset class. The accredited natural person requirement is different than the current accredited investor standard, a requirement imposed on the asset class in 1982 and concerned with net worth. A hedge fund investor would have to meet the accredited natural person requirement as well as the accredited investor standard. The proposal, the SEC maintained, is aimed at protecting the public against high-risk investing.

The proposal, part of a 67-page text that included a separate antifraud proposal, marked the first SEC effort to regulate a business categorized, as a hedge fund must be, under Regulation D registration with a requirement other than the 24-year-old accredited investor standard. The proposal also marked the latest SEC effort at hedge fund regulation since its failed bid last year to make the industry register under the Investment Advisor Act of 1940.

The accredited natural person requirement would relate to any individual investor in a "3(c) (1) pool." The SEC pointed out the requirement would not pertain to an individual with "indirect exposure" to a pool, such as a pension plan participant.

The SEC is also looking to adjust the $2.5 million investable worth minimum proposed under the accredited natural person requirement based on inflation on April 1, 2012, as well as each following five-year period.

The SEC acknowledged the proposal would "shrink the pool" of people eligible to invest in the asset class. The ideal, the SEC claimed, would be for the proposal to keep the level of people eligible to invest in the asset class at 1.3% of the population-far below the 8.47% able to meet the accredited investor standard now in effect.

The antifraud proposal in the text, available at www.sec.gov/rules/proposed.shtml, would, if approved, let the SEC enforce itself on any registered or unregistered adviser for providing misleading investment data.

The SEC will take feedback on both the proposed accredited natural person requirement as well as the wished-for antifraud measure at rule-comments@sec.gov. The public comment period will remain open until March 9.