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 in Rule 501 of Regulation D under the Securities 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 in Release 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 of Reg D updates this Spring, including “updates to the accredited investor definition.” (See SEC Commissioner Suggests Audited Financial Statement Requirement for Large Private Companies Using Reg D Offering in the Feb. 2, 2023, edition of Accounting & Compliance Alert.)
This article originally appeared in the June 2, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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