The legislation mandates that the SEC think beyond current income and wealth thresholds to define the sophisticated investors who are qualified to buy private securities.
House lawmakers Monday unanimously approved legislation that would increase the number of investors who can buy private securities by expanding the criteria beyond income and wealth. One of the bills, the Fair Investment Opportunities for Professional Experts Act, would deem as accredited investors people who have certain licenses or educational or professional backgrounds. For instance, brokers and investment advisors would qualify under the legislation. The bill, which is similar to a Securities and Exchange Commission rule in 2020 that expanded the accredited investor pool to include people with certain licenses and job experience, was approved by a voice vote.
The Accredited Investor Definition Review Act also was approved by a voice vote. The measure gives the SEC discretion to determine what certifications, designations or credentials investors must possess to be accredited. It also directs the agency to review the accredited investor definition every five years. Only investors who meet income and wealth thresholds – $200,000 or more in annual income or $1 million in net worth excluding the value of a home — or hold certain certifications can purchase unregistered securities. House approval of the accredited investor bills follows similar overwhelming passage of legislation last week focused on increasing the number of sophisticated investors.
Legislators on both sides of the aisle want to change the accredited investor criteria so the standards aren’t focused exclusively on wealth. They argue it would allow more investors to participate in the launch of startup companies and other ventures that are only available in the fast-growing private markets.
“The current accredited investor rules favor the rich and the affluent over people who have knowledge that are working maybe in their own area of expertise,” Rep. French Hill, R-Ark., and author of the fair investment opportunities bill, said on the House floor prior to the vote. “And then it effectively discriminates against someone who would be poor or potentially in a minority community.”
Hill said SEC statistics indicate that 1.3% of accredited investors are African American and 2.8% are Latino. “We all know that just because you have a million dollars does not mean you understand the complexities of [the] private market,” said Rep. Brad Sherman, D-Calif. “Conversely, you should not be prohibited from investing in these products if you do have knowledge of the risks involved but don’t happen to have a million dollars.”
Rep. Bill Huizenga, R-Mich., and author of the bill requiring the SEC to review the accredited investor definition, said the ability to participate in a private offering should be determined by a person’s knowledge rather than financial assets. “My legislation is about leveling the playing field,” Huizenga said. “Whether it’s in Kalamazoo or Portage, Benton Harbor or St. Joe, or Battle Creek or Springfield, investors should be able to support small business startups in their local community across southwest Michigan and around the nation.”
Securities that aren’t registered with the SEC, which are also known as private placements, are often risky, opaque and illiquid and lack the disclosure requirements of public securities.
Sherman said the legislation approved by the House Monday strikes the right balance between investor protection and expanding investment opportunities.
Republicans and Democrats are likely to separate on other ideas about amending accredited investor rules. Republicans generally want to ease them aggressively. Democrats want a measured approach.
“We want investor protection and we want investments to be made in private offerings by those who understand the risk and understand the company they’re investing in,” Sherman said. “The idea that we would open the door to every investment and allow an unlimited number of people with no particular expertise or meeting other standards … is not where we want to go.”
It’s unclear how the bills might fare in the Democratic-controlled Senate.
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