Everyone knows the definition of an Accredited Investor is broken. The rule sets a monetary hurdle for individuals who may participate in certain private securities offerings. It is obvious to all that wealth is not necessarily an indicator of sophistication. Still, the SEC has failed to address this shortcoming, and thus, the majority of Americans are blocked from participating in many private offerings – a sector of capital markets that is booming as promising early-stage firms strive to remain private for as long as possible due to over-regulation of public markets.
ICAN, or the Investor Choice Advocates Network, is doing something about this act of disenfranchisement. The group has filed a Petition with the Securities and Exchange Commission (SEC) to remove the wealth metrics and replace them with more rational “non-financial metrics.”
In a letter attached to the Petition, Nick Morgan, founder and President of ICAN, states:
“The Commission should replace the current net worth and income requirements with non-financial metrics so that investment opportunities in private share offerings may include more underrepresented and diverse communities.”
Nonfinancial metrics include education, certifications, and professional qualifications, which will “better empower currently non-accredited investors than current prohibitions.”
“While the net worth and income restrictions may have been originally rooted in the desire to protect individuals of modest means from making financially risky decisions, the rules have had the negative effect of preventing such individuals, and particularly communities of color, from being able to make their own risk assessments and attempting to accrue wealth at a high level. Indeed, Rule 501(a)’s net worth and income requirements have led to the underrepresentation of people of color in the investment industry more broadly,” explains Morgan.
The Petition also notes that the SEC failed its mandatory review of the definition last year.
The current leadership of the SEC has obtusely worked to make it more difficult to be deemed Accredited. The SEC has become known as the “anti-capital formation” Commission, ignoring a key mission of the SEC. Meanwhile, it has pursued highly political goals that at times stretch its authority, like climate disclosure rules.
With the change in Administration and leadership at the Commission, CI hopes a review of the definition will take place and remove unnecessary barriers for individuals who understand risk to broaden access to a key market that is far larger than public markets but is now blocked for most individuals. Denying individual access based on a bank account balance is not the appropriate way to determine access to private securities.
You may review the petition here.