Re: File No. 4-931 - Accredited Investor Examination
I support the Commission's consideration of a knowledge-based pathway to accredited investor status through an examination administered or developed by FINRA.
The current financial thresholds for accredited investor status may serve as a proxy for an individual's ability to withstand financial loss, but wealth is not necessarily a proxy for financial sophistication. A person can meet an income or net-worth threshold while possessing very little understanding of securities, valuation, liquidity risk, capital structure, dilution, private-market disclosures, or the risks associated with investments that do not receive the protections of a registered public offering. Conversely, an individual who does not meet those financial thresholds may possess considerable investment knowledge and be capable of understanding those risks.
Investor protection is important. Private investments can involve substantial risks, including illiquidity, limited disclosure, difficult valuation, transfer restrictions, dilution, loss of principal, and long periods during which an investor may have little or no ability to exit a position. Those risks justify meaningful qualification standards.
However, excluding an investor solely because of wealth does not directly test whether that investor understands any of them.
A rigorous examination could.
I believe an examination pathway should therefore supplement, rather than eliminate, the existing accredited investor standards. Individuals who currently qualify through income, net worth, or professional credentials could continue to do so, while knowledgeable investors could have an additional pathway based upon demonstrated competence.
Such an examination should not be superficial. It should require meaningful understanding of securities and private-market investing, including capital structures and investor seniority; equity and debt instruments; preferred versus common shares; dilution and stock-based compensation; valuation; liquidity and transfer restrictions; financial statements; private-company disclosures and their limitations; conflicts of interest; registration exemptions; concentration risk; bankruptcy and liquidation priority; and the possibility of losing the entire investment.
I would also encourage the Commission to consider whether passing the examination should provide permanent accreditation or whether periodic continuing education or requalification would better serve investor protection as markets and securities regulations evolve. There is also a broader issue of investor access. Increasingly, significant portions of companies' growth can occur while those companies remain privately held. Individual investors who are excluded from private markets may not gain access until an eventual public offering, after substantial growth and valuation appreciation has already occurred. Wealthier investors and institutions can participate during those earlier stages under the existing framework.
Investor protection should protect individuals from risks they do not understand. It should not unnecessarily prevent knowledgeable adults from assuming risks that they do understand merely because they have not yet accumulated a prescribed amount of wealth.
A carefully designed examination offers the Commission an opportunity to distinguish between those two circumstances.
Ultimately, accredited investor status should recognize more than an individual's balance sheet. If an investor can objectively demonstrate sufficient knowledge to understand the structure, risks, limitations, and potential consequences of private securities transactions, that demonstrated competence should be relevant to whether that individual is permitted to participate in them.
I therefore support establishing a rigorous, knowledge-based examination as an additional pathway to accredited investor status.