The SEC is proposing redefining the financial criteria for accredited investor status, needed to invest in hedge funds, limited partnership, and angel investments, dramatically upward.

The Securities and Exchange Commission has redefined what it means to be rich.

In looking for ways to better regulate hedge funds and other “private money” pools, the SEC in December proposed raising the net-worth requirement for people who are eligible to invest in the funds. Since the SEC has always taken a light regulatory approach to hedge funds, assuming they’re for rich people who can take care of themselves, the SEC’s definition of a hedge-fund investor has often been used a proxy for the government’s definition of “rich.”

And being rich today, it turns out, requires more than twice as much money as it did in the 1980s.

The SEC proposal says investors need to have investible assets of at least $2.5 million,excluding equity in any homes or businesses, to be eligible to sign on a hedge fund’s dotted line. That’s a huge jump from the current requirement, which says individuals have to have a net worth of at least $1 million, including the value of primary residences, or an annual income of $200,000 for the previous two years for individuals or $300,000 for couples.

The SEC says it’s just trying to keep up with inflation and the explosion in the number of millionaires in the U.S. The $1 million threshold was set in 1982, long before the stock-market boom of the 1990s and real-estate run-up of the past five years. The agency says so many people are now worth $1 million that they may not be financially savvy enough to understand the risks of investing in hedge funds.

According to the latest data from the Federal Reserve Surveys of Consumer Finance, households worth $1 million or more (including the value of their homes) represented more than 8% of total U.S. households in 2004. The new definition of rich would apply to only about 1% of the population, the SEC says.

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