December
2006, Newsletter:
SEC Votes Big Change in Accredited
Investor Standard
The U.S. Securities and Exchange Commission voted on December 13 to increase the minimum net worth required for an investor to be eligible to invest in hedge funds to $2.5 million from $1 million.
Next the SEC will put the proposal out for public comment. Final action by the investor protection agency will come later.
"We are going to be lifting the accredited investor standard from where it has been since 1982 at $1 million of net worth to $2.5 million," Chairman Cox of the SEC said.
The increase is approximately equal to an inflation adjustment from 1982 and also reflects "our sense of what matters and what is meaningful," Cox said.
Hedge funds have become a powerful market force. Their assets under management have doubled to more than $1.3 trillion over the past five years.
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As they have grown -- there are nearly 9,000 now -- hedge funds have expanded from their original client base of rich people and institutional investors to also take in money from the less well-to-do, raising government concerns about risk and suitability.
The SEC's proposed rule, if finalized, would shut the door on a lot of the just-barely wealthy who have been piling into hedge funds lately, although one market analyst said it would likely not affect larger funds with big clients.
"The impact is going to be on the smaller hedge funds," said Adam Sussman, senior analyst at TABB Group, which tracks the hedge fund industry. "People starting a hedge fund are going to have a harder time raising capital."
The kinds of assets an investor could count toward meeting the $2.5 million cut-off would include securities in public companies and certain private companies, the SEC said.
Real estate held for investment, as well as commodity interests,
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physical commodities and financial contracts held for investments could be counted. So could cash and cash equivalents, but not an investor's personal residence or place of business, the SEC said.
The new proposed minimum net worth -- known as the accredited investor standard -- would be higher than the present standard, which varies depending on the investor.
The base minimum is $1 million or $200,000 in net income for two consecutive years. The effective minimum net worth is already $1.5 million for hedge funds advised by registered investment advisers that charge performance fees. Not all hedge funds are advised by registered investment advisers, however.
See Also:
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