The Accredited Investor definition is one of the most obtuse rules enforced by the Securities and Exchange Commission. In place for decades, the rule defines who can participate in certain private securities offerings. Broadly speaking, an individual is deemed Accredited if they earn over $200,000 a year or have a net worth of more than $1 million – not counting a primary residence. If you are married, the income hurdle rises to $300,000.
The definition is apparently based on whether an individual can take the hit if an investment goes bad. All investments hold an element of risk, but private securities, more specifically private firms issuing securities, tend to entail greater risk. Investors shoulder this risk as the returns can be greater if the company executes and things work out.
While the above logic makes sense to some, it misses a more important qualification for investors. Something called financial acumen or sophistication.
Everyone knows someone who would qualify as Accredited yet probably shouldn’t be participating in a private securities offering. Alternatively, we all know sophisticated individuals who possess the knowledge and experience to better understand a private securities offering. Anyone who has studied business is taught that when you are younger, you should take on more investment risk. When you are older, you may want to pump the brakes as time is running short.
During the Gensler tenure of leadership at the Commission, he sought to make it MORE difficult to be deemed Accredited. This upset many Republicans and even some Democrats – both who acknowledge the current definition is clearly discriminatory. Blocking a segment of the population from voluntarily participating in a securities offering disenfranchised many while potentially harming access to opportunity.
ICAN, or the Investor Choice Advocates Network, has battled the SEC for years on the punitive definition of an Accredited Investor. In a document challenging the SEC, ICAN explains the irrational posture of the SEC:
“The core parameters of that definition have not changed in many years, and the Commission has steadfast(ly) refused to recognize additional categories of accredited investors beyond those measured based only upon personal earnings or assets owned.
As it stands today, this bright line but extremely limited regulatory test remains as an anachronistic holdover from an earlier time when capital formation for most investments primarily was limited to a small group of wealthy individuals, banks, financial institutions, and well-healed private equity and venture capital funds. But, since the accredited investor definition first was defined, U.S. capital markets and business formation have undergone massive change and growth.
Yet many Americans have been and remain unable to participate in the wealth generation created by this growth, and this is directly attributable to the accredited investor definition and its concomitant regulatory prohibition that legally prohibits those raising capital to seek investment from non-accredited investors. Does this make sense in America in 2024 and beyond?
The answer to that question has profound implications for tens or hundreds of thousands of smaller investors who currency find themselves locked out of one of America’s greatest engines for individual wealth creation. Moreover, the damage inflicted by this unreasonably strict and outdated rule extends beyond potential investors and includes the entrepreneurs and small business owners that are unable to access much-needed investment capital to seed, grow, and support their enterprises.”
While the Gensler Commission stuck its head in the sand, it appears ICAN is receiving a more encouraging response from the Commission under the guidance of Acting Directory Mark Uyeda who took over the helm of the SEC following the election of President Donald Trump.
In an email, ICAN founder Nick Morgan states:
“After more than two years of silence in response to ICAN’s rule petition to reform the accredited investor restrictions, the incoming SEC had a refreshingly different response to ICAN’s lawsuit. Without going into the details of our confidential settlement discussions, we are happy to report that we agreed to extend by 30 days the SEC’s time to respond to our mandamus proceeding “to allow the parties time to negotiate a potential resolution.” We look forward to working with the Commission on this important reform.”
While it remains unclear what the reanimated Commission will do, it seems it may take a more rational approach to addrressing the current prejudiced definition.
Developing…