The Hedge Fund Association has urged the US Securities and Exchange Commission to avoid changing the definition of an “accredited investor,” in fear that such a move would stifle job creation and capital formation.

The Hedge Fund Association has urged the US Securities and Exchange Commission to avoid changing the definition of an “accredited investor,” in fear that such a move would stifle job creation and capital formation.

On an individual level, the income and net worth threshold for what constitutes an accredited investor is currently set at $200,000 and $1 million respectively.

“On behalf of the private investment fund industry, including hedge funds, private equity funds, venture capital funds and real estate funds and other growing operating businesses seeking capital in the US from private investors, the HFA strongly and respectfully urges the SEC to reject an increase in the current requirements, originally set in 1982, to account for inflation,” the HFA said in a letter to the US authority this week.

It pointed out that the definition was “significantly narrowed” when the value of an investor’s primary residence was excluded under The Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010.

The Dodd-Frank Act requires the SEC to re-examine the definition of what constitutes an “accredited investor” every four years. The overarching intention is to prevent less sophisticated investors from becoming victims of financial fraud and to protect them when making private investments, for example, that are more opaque and require greater due diligence.

“While the HFA fully appreciates and shares the SEC’s goal of protecting investors from making investments which are beyond their financial sophistication, the HFA believes using net worth or income as a litmus test for investor sophistication is outdated,” said David Friedland, HFA chairman.

The association said it favors alternatives such as a knowledge or education-based standard; a requirement that a non-sophisticated investor engage an independent registered investment professional to review and approve the investment; or limiting the maximum percentage of net worth that any investor may contribute.

While supporting “sensible change” that enhances investor protection, the HFA said it is “strongly opposed” to any change in the rule which would restrict the investor pool. It highlighted that the disparity in assets under management between large and small funds has widened since the recession of 2008. Small fund managers rely heavily on investments made by high net worth individuals rather than institutional investors, it said.

“The HFA believes that changes to the net worth requirements would fundamentally undermine the private placement market which infused nearly $50 billion into the US’ economy in 2013 and will materially and negatively impact small business growth by reducing the number of accredited investors in the US by more than half,” said Ron Geffner, HFA vice president.

As reported by Family Wealth Report, last July the SEC adopted a new rule to implement a JOBS Act requirement which involves lifting the ban on general solicitation or general advertising for certain private securities offerings. While many welcomed the move, critics argued that lifting the ban will expose small and/or inexperienced investors to fraud as a result of loosened investment protections.

The Hedge Fund Association is an international non-profit organization made up of hedge funds, funds of hedge funds, family offices, high net worth individuals, financial advisors and service providers.

In the US, it has chapters in the Northeast, Southeast, Midwest and on the West Coast. Internationally, it has chapters in Europe, Asia, Australia, Latin America and the Cayman Islands.