Statement at Open Meeting on Amending the “Accredited Investor” Definition

I would again like to thank the Chairman, the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis, the Office of General Counsel, and other staff throughout the building for your work on this proposal. 

The current accredited investor definition is one of the more offensive concepts lurking in our federal securities laws.  Cloaked in a mantle of investor protection, the definition effectively states that an individual cannot be trusted with respect to investing her hard earned money in private offerings, because she does not have the requisite financial sophistication to understand the increased risk associated with such offerings.  That is, of course, unless she has an income in excess of $200,000 in each of the two most recent years, has a joint income with her spouse in excess of $300,000 in each of those years, or has a net worth exceeding $1 million, excluding the value of what is likely her largest asset: her home.  Our current definition includes investors that spend their days cruising around in a Ferrari that Daddy bought them, yet excludes investors whose weeks are spent earning money and weekends are spent figuring out how best to invest it. 

The definition’s corrosive effect on an individual’s economic liberty is one that I hear about all the time.  People just don’t get it.  A core American value is that people “are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”[1]  The government’s role is to “secure these rights,”[2] not to ensure that people spend their hard-earned money only in ways that satisfy their cautious regulators.  Why do we so casually toss aside people’s liberty when it comes to their financial decisions?  Today’s proposal does not ask that fundamental question, let alone answer it in a satisfactory way.  That said, the recommendation does put some meaningful reforms to the accredited investor standard on the table.

First, the release acknowledges that the current thresholds work better in certain geographic areas, such as coastal cities and the Northeast than in places like my hometown of Cleveland, Ohio and other regions throughout the Midwest, and the South.  Plenty of individuals in places like Cleveland have the same financial sophistication as their counterparts in New York or San Francisco, but the lower cost of living in the heartland means that their salaries are also lower.  Adjusting the current thresholds in certain areas of the country to reflect these differences could help facilitate capital formation, allow neighbors to invest in one another’s futures, and breathe new economic life into these regions.  The release today, while failing to amend the existing financial thresholds, seeks further comment on whether the thresholds should be reduced in certain geographic regions of the country.

Second, today’s release takes some important first steps toward allowing an investor’s actual sophistication, rather than her sophistication as proxied by wealth and income, to be considered.  Specifically, the proposed rules add a category for natural persons to qualify as accredited investors based on certain professional certifications and designations or credentials from an accredited educational institution.  Preliminarily, the release proposes that the Commission issue an order finding that persons holding Series 7, 65, and 82 licenses are accredited investors.  I hope that this list of three professional certifications is just the beginning, but how long the list grows will depend on input from the public.  We need the public’s input on whether people who have passed any of the exams developed or administered by FINRA, obtained certifications and designations administered by private organizations, or earned a degree in finance, business, or accounting from an accredited educational institution should be considered an accredited investor. 

Third, today’s release expands the list of entities that qualify as an accredited investor and qualified institutional buyer.  These proposed changes provide greater certainty for legal entities that have been omitted from the accredited investor and qualified institutional buyer definitions simply because they either did not exist when the rules were last amended, such as LLCs, or because they did not fall precisely within the enumerated list of entities, such as Indian tribes and governmental bodies.  These are common sense proposals that are long overdue.    

I thank the staff again, and I support the recommendation as an important first step towards liberalizing the definition of accredited investor.  I look forward to hearing what commenters have to say.