The current definition of an Accredited Investor has long been understood to be misdirected, disenfranchising millions of potential investors. Today, the definition defines an individual as “Accredited” based on a wealth metric. Broadly, this means earning over $200,000 a year ($300,000 if married) or having a net worth of over $1 million (not counting a primary residence). There is no mention of education, experience, or acumen, clearly a far better way to gauge someone’s capacity to understand a securities offering.
While everyone understands the definition is discriminatory, a few want to make it more difficult for individuals to determine how they invest their money. These policy Mandarins lean on claims of investor protection concerns: widows and orphans getting fleeced. The sky is going to fall, and all the FUD that goes along with it. It is a truism that people involved in the policy realm are not necessarily the best and brightest.
Today, the House Financial Services Committee has announced that it is moving forward on an update to the definition. HR 3394, or the Fair Investment Opportunities for Professional Experts Act.
Chairman of the Committee, French Hill, issued a statement on the legislation:
“Wealth alone should not dictate who can and cannot invest in private offerings. Countless individuals, through work, education, or other experiences, have developed the knowledge to make informed investment decisions, yet are excluded simply because of their income level. Our bill addresses this imbalance by expanding investment opportunities for capable investors while helping small businesses access the capital they need to grow.”
Hill has sponsored the bill and is supported by co-sponsor Juan Vargas, a Democrat, and thus establishes bipartisan support.
Earlier in the year, multiple bills were submitted to address an improvement to the definition. These are outlined here.
When this bill was previewed it maintained the existing wealth hurdles but added several non-monetary paths to be deemed accredited. This included individuals who are broker dealers or investment advisors as well as individuals involved in regulatory organizations engaged in the registration and licensing of individuals in the securities sector.
As well, the SEC may determine individuals are accredited based on education or job experience or professional knowledge. This means the Commission has much leeway in the final wording of the definition.
Depending on the outcome, online capital formation platforms could be impacted significantly as a change could open up Reg D offerings to a wider audience. As filing an exemption for Reg D is pretty simple and low cost, it is the most popular path to accessing private capital and thus utilized by most promising early stage ventures.
It was not immediately clear when the legislation would be debated by the Committee, but it should be very soon.
