The U.S. House of Representatives recently approved the Fair Investment Opportunities for Professional Experts Act – HR 1585 – by straight voice vote. The measure, sponsored by Rep. David Schweikert (AZ) codifies changes to the accredited investor definition.
The Current Rules
Under the existing rules, in order to qualify as an accredited investor, an individual must possess a yearly salary of $200,000 or greater, or a net worth (not including a primary residence) of at least $1 million. Accredited investors are allowed to engage in private securities offerings in a range of investment categories. However, the offerings, mostly under Regulation D, are used by many early-stage companies to acquire capital for growth. Promising startups often raise capital directly from accredited investors.
As it has become more expensive and more regulation-heavy to offer investments in public markets, issuers have moved away from participating in initial public offerings. As a result, a considerable amount of growth and associated wealth has been confined to the wealthiest. The current definition of accredited investor misses certain aspects of sophistication that ought to be considered. For instance, many people who may qualify under the net worth criteria should probably not be permitted to engage in private offerings. As well, many sophisticated individuals are currently excluded due to old rules that need to be changed.
Proposed Changes to the Law
Proposed amendments to the Securities Act of 1933 in the House bill involving changes to the accredited investor definition related to participation in private offerings include:
* A person with income greater than $200,000 over the last two years, or income with the spouse greater than $300,000
* A person with a net worth or joint net worth with their spouse greater than $1 million (primary residence excluded)
* A person possessing a financial services license issued by the state
* A person, as determined by the SEC, to have qualifying experience or education
The purpose of the bill is to expand the number of individuals that are able to participate in private investments – a group of individuals that have been kept out of these types of investments for a long time. The SEC will need to make the decision on how to qualify sophistication. This could involve individuals taking an online test that verifies their knowledge of securities and confirming their understanding of the risks involved, including the fact that that the risk includes the potential to lose all money invested.
On to the Senate
The next step on the road to nmaking changes to the accredited investor definition is to have the Senate pass its version of the bill, and then eventually have the President sign an agreed-to final measure into law. The Senate introduced bipartisan legislation in March 2018 to make changes to the definition of accredited investor. As of now, this is where the measure stands.
