The House on May 31, 2023, voted 383-18 to pass legislation directing the SEC to set up an exam program that would certify investors as accredited. H.R. 2797, the Equal Opportunity for All Investors Act of 2023, is sponsored by Representative Mike Flood, a Nebraska Republican.
The bill, which has one Republican and two Democratic cosponsors, is an expression of bipartisan dissatisfaction with the SEC’s wealth-based test for determining who is allowed to fend for themselves in less-regulated, less-transparent private securities offerings.
Flood’s bill would give the SEC one year following enactment to set up an exam program that “is designed with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail,” and includes methods that would demonstrate competency around different types of securities, private and public company disclosure requirements, corporate governance, financial statements, potential conflicts, and aspects of unregistered securities that include risks associated with limited liquidity and disclosures, among other potential pitfalls. The exam itself would be administered by the Financial Industry Regulatory Authority (FINRA).
“It is my firm belief that the accredited investor definition should not be tied exclusively to wealth,” Flood said on the House floor. “Instead, we should unlock opportunities for knowledgeable investors that may not come from means.”
The measure, he added, “strikes an effective balance.”
“It brings more investors into the accredited investor pool but also contains guardrails that would filter out individuals that do not fully understand private offerings and the investment risks associated with them,” he said. “We have legislation today that would make for a thorough but fair examination for investors that want to become accredited investors.”
Today, the standard, found inRule 501ofRegulation Dunder theSecurities Act of 1933, uses wealth as a proxy for an investors’ ability to fend for themselves in private offerings. Prior to the SEC’s 2020 amendments, an accredited investor needed to make $200,000 annually, or $300,000 jointly with a spouse, or have at least $1 million in assets, with their primary residence not counting toward that asset threshold.
The SEC in 2020 issued rules inRelease No. 33-10824,Accredited Investor Definition, allowing investors holding certain professional licenses, such as a Series 7, to qualify as accredited, even if they fall short of meeting the income or asset tests.
The SEC, in its regulatory agenda, is planning to propose a set ofReg Dupdates this Spring, including “updates to the accredited investor definition.” (SeeSEC Commissioner Suggests Audited Financial Statement Requirement for Large Private Companies Using Reg D Offeringin the Feb. 2, 2023, edition ofAccounting & Compliance Alert.)
This article originally appeared in the June 2, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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The Equal Opportunity for All Investors Act of 2023, sponsored by Representative Mike Flood, signifies a significant shift in the definition of accredited investors and their qualifications for engaging in less-regulated private securities offerings. This legislation aims to reshape the criteria for accreditation, moving away from purely wealth-based qualifications to a more knowledge-centric approach.
Let's break down the key concepts mentioned in this article:
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H.R. 2797, the Equal Opportunity for All Investors Act of 2023: This bill proposes a new system where investors can qualify as accredited not solely based on wealth but by passing an exam demonstrating their financial sophistication and understanding of various securities, disclosure requirements, corporate governance, financial statements, and risks associated with unregistered securities.
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Accredited Investor Definition: Historically, the SEC used wealth as a primary determinant of an individual's capability to invest in private offerings. The traditional criteria included an annual income of $200,000 (or $300,000 jointly with a spouse) or assets totaling at least $1 million, with the primary residence excluded from the asset threshold.
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SEC's 2020 Amendments: These amendments, outlined in Release No. 33-10824, expanded the accredited investor pool to include individuals with certain professional licenses, like a Series 7 license, even if they didn't meet the income or asset tests.
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Proposed Updates to Regulation D: The SEC plans to propose revisions to Regulation D, including updates to the accredited investor definition. These changes could potentially incorporate new qualifications or criteria for determining accredited investors, likely focusing on a more nuanced understanding of investments rather than purely financial thresholds.
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Role of FINRA: The bill proposes that the exam, designed by the SEC, would be administered by the Financial Industry Regulatory Authority (FINRA), an organization responsible for regulating brokerage firms and exchange markets.
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Purpose of the Legislation: Representative Mike Flood emphasizes the need to broaden the accredited investor pool beyond just wealth-based individuals, aiming to include knowledgeable investors who may lack substantial financial means. The goal is to create a more inclusive system while maintaining safeguards to ensure investors comprehend the risks associated with private offerings.
This legislation reflects a departure from the longstanding practice of using wealth as the sole indicator of an individual's ability to engage in private securities offerings. Instead, it prioritizes knowledge and understanding, potentially opening doors for a more diverse group of investors to participate in these markets while ensuring they possess the necessary expertise to navigate the associated risks.
