House Passes Bill Expanding Pool of Accredited Investors
On May 31, 2023, the U.S. House of Representatives passed a bill that, if ultimately enacted into law, would expand the pool of “accredited investors” able to participate in private capital markets and purchase private placements. With an overwhelming show of bipartisan support, H.R. 2797, titled the “Equal Opportunity for All Investors Act of 2023” (the Bill), passed with a 383-18 vote.
Generally, every offer of securities in the United States must be registered with the U.S. Securities and Exchange Commission (SEC or Commission) pursuant to the Securities Act of 1933 (the ’33 Act). Certain categories of securities are exempt from these requirements, however, such as private placements under Regulation D of the ’33 Act (Reg D). Because private placements are not registered with the SEC and are largely illiquid investments that may be sold to investors with limited disclosures, these products are often reserved for accredited investors who are regarded as being more sophisticated.
Under current SEC rules, accredited investors are defined as those who make at least $200,000 annually (or $300,000 if combined with a spouse) or have a net worth of more than $1 million, not including the value of their home. The SEC revised its accredited investor definition in 2020 to include persons with certain professional certifications or other credentials, such as stockbrokers and investment advisors. But restricting accredited investor status to those having a certain level of wealth or professional certification has come under scrutiny in recent years. Whether out of concern for fairness, or the desire to increase the amount of capital available to smaller businesses, there have been calls from both sides of the aisle to widen the scope of investors able to buy private placements.
The Bill directs the SEC to establish an examination whereby successful participants could be certified as accredited investors. The Commission would also have to amend the Reg D definition of accredited investor accordingly. The examination – administered and offered free of charge by a registered national securities association – would be “designed with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail.” The examination would test a person’s competency in areas including types of securities, disclosure requirements, corporate governance, financial statements, various aspects of unregistered securities, conflicts of interest, and other criteria deemed necessary or appropriate. As the Bill’s sponsor Representative Mike Flood (R-NE) commented, the examination “brings more investors into the accredited investor pool but also contains guardrails.”
Following passage by the House, the Bill was received in the U.S. Senate on June 1, 2023, and was referred to the Committee on Banking, Housing, and Urban Affairs for consideration. Prospects in the Senate are unclear, but if the legislation becomes law, the SEC would have one year following enactment to establish the accredited investor examination process.
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including federal and state legislative developments affecting both investors and financial advisors. If you have a question about this recent announcement or any other industry matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a free and confidential consultation.