Statement on Amending the “Accredited Investor” Definition

Today’s cautious expansion of the accredited investor definition to include additional categories of natural persons and entities is a step in the right direction.  Series 7, 65, and 82 license holders and knowledgeable employees of private funds clearly have the knowledge and expertise to evaluate the merits and risks of an investment.  These newly minted accredited investors are not your typical mom and pop retail investors, a fact that should assuage the concerns of those that fear any expansion of the definition. 

It does not assuage my concerns.  Why shouldn’t mom and pop retail investors be allowed to invest in private offerings?  Why should I, as a regulator, decide what other Americans do with their money?  The alleged justification is investor protection: people can’t lose their money on investments if they aren’t allowed to invest.  Yes, that is true, but where does that principle take us?  Someone who does not invest at all will not lose any money on investments.  She will, however, lose.  She will lose the opportunity to see her money grow more than it could sitting in a bank account.  She will lose the opportunity to be part of enterprises that she believes will transform society.  And she will lose her right to make decisions for herself.

Now, of course, nobody is advocating prohibiting non-accredited investors from investing.  Some people argue, however, that the public markets are the only ones in which non-accredited investors should participate.  Private markets, however, are where a lot of the economic growth is happening.  Moreover, the accredited investor concept has caused the Commission to don a merit regulator’s cap, which has—pardon the pun—gone to our head and emboldened us to act as merit regulators in other places too.

The accredited investor concept assumes that individuals cannot be trusted to exercise proper due diligence before making an investment decision and therefore bars individuals from having the investment opportunity in the first place.  Freedom and responsibility are inseparable, so it is no surprise that a regulator that does not acknowledge an individual’s ability to bear the consequences of her actions does not respect her liberty interests.  Many commenters reminded us that those liberty interests matter.[1]

For decades, the SEC has permitted wealthy people[2] to make private investments under the theory that their financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act unnecessary.  This standard was in part developed by the Commission based on the Ralston Purina case, where the Supreme Court held that “[a]n offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering.’”[3]  One commenter takes issue with this approach and suggests that whether one can fend for oneself depends on whether one has access to the type of information that would be in a registration statement.[4]  The commenter suggests creating an exemption that makes access to the private markets conditional not on the wealth of the investor, but on the provision by the issuer of a basic set of information about the investment.  This approach might not work because the mandated set of disclosures likely would grow over time.  That said, this potential solution, on which I would welcome feedback from the Small Business Capital Formation Advisory Committee and other interested parties, could help to get us out of the business of deciding who is sophisticated and who is not.

A person’s economic status may demonstrate an ability to withstand losses, but it certainly does not demonstrate financial sophistication.  The result of pretending that wealth is a good measure of sophistication is a standard that discriminates against financially sophisticated, lower- income and net worth Americans.  These Americans cannot use their experience, local knowledge, education, and investing acumen to build a balanced investment portfolio, to maximize the nest eggs they pass on to their children, or to invest in their own communities.[5] 

Today’s changes are rooted in a recognition that wealth and income are not always great proxies for an investor’s sophistication.  The Series 7, 65, and 82 licenses qualified today represent the tip of the iceberg of professional certifications, designations, and other credentials that should qualify an individual for accredited investor status.  Notably, the release invites members of the public to propose to the Commission specific certifications, designations, degrees, or programs of study that should qualify someone to be an accredited investor.  I have concerns with the Commission evaluating the merits of degrees or courses at specific accredited educational institutions.  Such a piecemeal approach would be a huge burden on the Commission and would put it in the odd position of picking winners and losers among educational institutions.  Preferably, applicants would submit proposals that are not limited to a degree or program of study at a specific educational institution.  For example, should the Commission consider qualifying as an accredited investor an individual that has successfully completed two investing-related courses from any accredited college or university?  Direct engagement from the public will be essential to identifying the specific certifications, designations, and other credentials that should qualify individuals as accredited investors. 

Finally, I am pleased that we are expanding the list of entities that qualify as an accredited investor and qualified institutional buyer.  These amendments add a catch-all category for entities owning investments in excess of $5 million and that are not formed for the specific purpose of acquiring the securities being offered.  Indian tribes, which did not qualify as accredited investors under the old rules, will have the ability to qualify under this provision.  I would have preferred an approach that allowed tribes to qualify by counting their assets, instead of just their investments.  One Indian tribe commented that it “does not see a valid reason why corporations or other business entities should be subject to a $5 million asset standard while Indian tribes are subject to a $5 million investment standard.”[6]  I, too, do not see a valid reason for applying an asset test to certain entities, while applying an investment test to Indian tribes and other governmental bodies.

Thank you to the Chairman, the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis, and the Office of General Counsel for your hard work on this rule.