I am submitting this comment based on my background as a former licensed securities representative (Series 7, 63, and 66) with experience in private equity accounting (early career at Blue River Partners, LLC). In my professional judgment, the private capital markets have grown far beyond their original intent as a small arena for truly sophisticated investors. This submission discusses concerns about exempt offerings, the accredited‐investor criteria, and how an exam‐only pathway could affect investor protection and capital formation. Private Market Growth and Investor Risk Recent analyses show an enormous and rapidly expanding private investment market. One report notes there are now “more than 15,000 firms worldwide and $9 trillion in global assets” in private equity. Private companies like OpenAI and SpaceX carry valuations (hundreds of billions each) that rival or exceed the largest public companies, yet they remain outside public‐market oversight. For example, “trillions in enterprise value now circulate through private channels lacking the disclosure standards, governance frameworks, and investor protections that public markets established”. Similarly, Bain & Company found about 28,000 private companies sitting in buyout portfolios worldwide (representing $3.2 trillion) with holding periods often exceeding four years. In short, an unprecedented volume of capital is flowing into opaque, illiquid funds. This explosive growth poses systemic concerns. Private vehicles typically lock up investor capital for long periods and provide limited transparency. The secondary market for private fund interests is still immature: transaction volumes in private secondaries jumped 45% in 2024, yet “transparency regarding underlying assets and performance remains severely limited”. Investors often bear multiple layers of fees (SPV fees, broker markups, carried interest) with poor disclosure. Even sophisticated institutions frequently opt out: in one survey 80% of investors said they sometimes declined to invest in a private fund due to onerous terms. Meanwhile, enforcement actions underscore the risks to individuals. The SEC recently charged five unregistered brokers who raised $528 million in unregistered pre-IPO securities offerings from over 4,000 investors, charging undisclosed markups as high as 150%. This illustrates how unsophisticated investors (and even those who might qualify as accredited by net worth) can be preyed upon in unregistered markets. The “desperate machine” of private capital can lure average Americans with promises of unicorn returns, only for them to find few exit options and little information if markets turn down. In sum, private markets have become vast and powerful, yet remain characterized by illiquidity and opaque structures. This raises the stakes for ensuring only truly capable investors – those with the education, risk tolerance, and discipline – participate. Accredited Investor Criteria Are Outdated The existing wealth‐based criteria in Regulation D (Rule 501(a)) also warrant scrutiny. Today an individual need only have $1 million in net worth (excluding home) or $200,000 annual income (or $300,000 with a spouse) to qualify. These thresholds have been unchanged for decades and have eroded with inflation. NASAA and other commenters have urged indexing or raising the limits. For example, SEC staff once proposed adjusting the criteria to $500,000 income and $2.5 million net worth (real 2015 dollars), which was shown to “significantly enhance investor protection”. In 2020, NASAA warned the Commission that “the Commission’s refusal to propose indexing these thresholds to inflation… is particularly concerning”. Even Congress has considered inflation-adjusted rules (e.g. H.R.4762, H.R.1585). Empirical studies confirm that high net worth is not equivalent to investing sophistication. Finke and Guo (2019) find “strong evidence that older households are at risk of meeting the accredited investor definition without having the sophistication needed”. Likewise, Forbes contributor John Girouard noted that many with net worth above $1M “may be smart and successful in their fields, but most are confused about the basics of investing”. In practice, this means wealthy retirees or small business owners could qualify as accredited while lacking portfolio experience. Such investors are often prime targets for unregulated offerings. It is counterproductive if the accredited regime shifts limited protection from these individuals to others who may also be inadequately prepared. Given the scale of wealth inflation, a comment of mine argues that the dollar amounts should at least be indexed to inflation so that only those genuinely affluent (in real terms) gain special privileges. Without this, we essentially “water down” the meaning of accreditation. Exam and Experience: Not a Panacea The SEC’s proposal (File No. 4-931) contemplates designating passage of a FINRA-developed exam as one path to accredited status. In principle, a knowledge-based test could help identify financially literate individuals. However, both regulators and practitioners have raised concerns. The Release itself notes questions such as whether a passing score should confer permanent status or require re-testing (echoing one comment: “if one passes… is [it] forever or for a specified period after which… re-take?”). More fundamentally, NASAA observes that "tests or certifications should not in and of themselves be sufficient". An exam captures financial knowledge at a point in time, but not an individual’s real-world experience or risk-bearing capacity. Notably, NASAA argued that any exam pathway must be “coupled with demonstrable experience”. In 2020 NASAA commented that if certifications (Series 7, 65, 82, etc.) are used to confer accreditation, they should require a multiyear experience floor: “five years of experience should accompany certification in order to establish sophistication”. The rationale is straightforward: passing an exam does not guarantee one can properly value an unregistered offering, tolerate losses, or discern risks without a prospectus. Similarly, Nasdaq Inc. warned that “an examination of knowledge, without an additional requirement of industry experience, is not a satisfactory means to determine whether an investor can bear the risk of and evaluate a potential investment in an exempt offering”. In other words, an accredited investor should ideally combine both education and practical track record. A purely paper-based test should not supplant the tried-and-true benchmarks (wealth and professional licenses) without guardrails. Protecting Average Investors Allowing broad access to private capital can do real harm to average Americans. Unlike public equities, exempt offerings carry fewer legal protections. Companies raising under Regulation D typically provide limited disclosures (no SEC-registered prospectus) and can impose lock-up or redemption restrictions. If an economic downturn hits, a retail investor might find their money tied up with no public market exit and minimal information. This is the opposite of the fairness and transparency that public offerings ensure after decades of investor-friendly reforms. For example, the SEC noted that a candidate might invest in an exempt offering “without the benefit of a registration statement or similar disclosure”. In practice, that means relying on sparse private placement memoranda and seller-provided documents. If an issuer fails or its sector swoons, the amateur investor can be left scrambling. This risk is exacerbated by the aggressive marketing tactics sometimes seen in private placements (high-pressure seminars, affiliate networks, etc.). The Society of Actuaries and S&P Indices Versus Active (SPIVA) studies (not cited here) consistently show most retail and even professional active managers underperform public benchmarks net of fees. The implication is that aspiring individual investors often lack the skill to “beat the market.” Without at least a strong foundation, many would likely suffer losses. That’s why exempt market participation has traditionally been limited to those with proven knowledge or financial cushion. To toss accreditation open to every high-income or test-passing individual risks undermining investor protection. Recommendations Based on the above, I respectfully suggest the following: - Maintain or raise standards, don’t dilute them. Any expansion of accredited categories should occur after raising income/net worth thresholds (or indexing them) to reflect today’s economy. This ensures that expanding access truly goes to additional knowledgeable investors, not just those who got richer with inflation. - Combine exam with experience or limits. If a FINRA exam pathway is adopted, it should be tiered. For example, an exam pass could qualify an investor for only a limited investment per offering (or require additional disclosures), until they have demonstrated a history of successful private investing. Alternatively, require a waiting period or evidence of relevant work history (as NASAA proposes). The Commission could also consider requiring continuing education or periodic re-examination to maintain accredited status. - Require robust disclosures. The exam alone does not solve the opacity of private deals. If more retail investors enter this market, I urge stricter offering disclosures or professional “gatekeepers” for new accredited pathways. The SEC might mandate third-party due diligence or annual portfolio reporting for issuers relying on broadened accreditation criteria. - Enforce anti-fraud vigorously. A surge in new private investors will attract unscrupulous sellers. The SEC’s own filings (e.g. charging the unregistered brokers with $528M scheme) show the danger. The Commission should signal that exempt offerings must comply with all antifraud provisions and explore warning labels or accreditation requirements tied to compliance history. Conclusion The accredited investor definition should remain a gatekeeper – admitting only those who truly understand and can bear the risks of exempt investments. The SEC’s proposed exam could be a useful tool for assessing financial literacy, but it cannot stand alone as a qualification. High net worth plus test scores does not ensure wisdom. Any move to qualify natural persons via an exam must be supplemented by other safeguards – higher wealth thresholds, required experience, and stronger offer disclosures – to avoid unintended harm. Thank you for considering these points. Sources: Author’s knowledge and experience, SEC Release No. 33-11445 (File No. 4-931), NASAA 2020 Comment Letter, SEC accredited investor educational resources, and relevant market analyses.