Thank you, Mr. Chairman. These days when we talk about AI, we usually mean artificial intelligence. AI at the SEC, however, has a more sinister meaning—accredited investor. I have never been a fan of paternalistic limitations on how Americans can invest their hard-earned money, but the AI concept courses through the securities laws. We have to make the best of a bad situation. I am pleased to support today’s notices contemplating orders that would expand the ranks of accredited investors so that more Americans could decide for themselves whether they want to invest in private markets.
Regulation D provides a pathway for companies to conduct private offerings without registering them under the federal securities laws.1 A central feature of that framework has long been the concept of the “accredited investor.” Under these rules, companies can raise money in an unregistered offering from accredited investors, and accredited investors can participate in private investment opportunities generally unavailable to the broader public.2
While laudable in intent, protecting non-wealthy3 retail investors by shrinking their investment options is not the way to go. By ostensibly protecting unsophisticated investors from downside risk, we also “protect” them from the upside potential of investing in the private markets. The accredited investor gate closes off investment opportunities that could aid in portfolio diversification, prevents people from helping friends and family start companies, and precludes investors from sharing in the growth of companies before they go public. Most importantly, it impinges on investors’ freedom.
Private market investments are not right for everyone, but individual investors should decide what is right for them. A government that tells people what they can and cannot invest in discourages them from getting the education and doing the research to make well-informed decisions. As investors are turning to the other AI to assist them in their research and self-education, the unreasonableness of the accredited investor definition is even more striking.
Today’s proposed expansions of the accredited investor pool recognize that “wealth and income are not always great proxies for an investor’s sophistication.”4 As you heard, the noticed orders would move us forward by designating Certified Public Accountants, Chartered Financial Analysts, Certified Financial Planners, and holders of FINRA Series 79, 86, and 87 Licenses as qualifying for accredited investor status. Pursuant to another proposed notice, passing a FINRA exam designed to assess knowledge of various securities and investing topics would automatically qualify the taker as an accredited investor. The exam would be open to anyone over the age of 18, the fee to take it would be relatively modest, and its test centers would be within easy driving distance for most Americans.
Previously, I have expressed reservations about a piecemeal approach to expanding the accredited investor definition.5 This approach has the Commission evaluating the merits of particular credentials, degrees, or certifications. It expands access to private markets bit by bit, but it also ensconces the Commission as judge: under an incremental expansion approach, we make sweeping generalizations about groups of investors and their relative sophistication. In that sense, an exam that is accessible to most people is an exciting prospect. But it still embodies a government-as-gatekeeper mentality. Why should Uncle Sam make you take a test before he accords you full investment freedom? Moreover, it is not a one-and-forever-done test. Why would knowledge sufficient to participate in our private capital markets go obsolete in 10 years? My libertarian persnicketiness aside, even as I dream of greater freedom, I welcome progress in that direction. The proposed exam and the companion designations are big steps toward empowering investors to decide for themselves how they want to invest.
I want to thank the staff of the Division of Corporation Finance, including the Division’s Office of Small Business Policy; the Division of Economic and Risk Analysis; the Office of the General Counsel; the Division of Trading and Markets; the Office of the Chief Accountant; and the Division of Investment Management for their work on these important issues, and I look forward to the public’s comments.
In closing, I have two questions for the staff:
- All these designations require ongoing effort to be maintained. What will happen to investors’ ability to make follow-on private investments if life circumstances preclude them from maintaining their credentials or taking the test again after it expires?
- The Commission already has offloaded on FINRA a lot more tasks than I think appropriate for a non-governmental organization. Why is FINRA the right entity to design and administer an accredited investor test? Could someone else apply to design and administer an alternative test?
- 1See Regulation D, 17 C.F.R. §§ 230.500 – 230.508.
- 2See 17 C.F.R. § 230.501(a).
- 3Under the current rules, individuals qualify as accredited investors if (i) their net worth exceeds $1 million (excluding the value of the investor’s primary residence), (ii) their income exceeds $200,000 in each of the two most recent years, or (iii) their joint income with a spouse exceeds $300,000 in each of those years and the individual has a reasonable expectation of reaching the same income level in the current year. In 2020, the Commission added investors holding FINRA Series 7, 65 and 82 licenses to the definition of an accredited investor. See SEC Press Release, “SEC Modernizes the Accredited Investor Definition” (Aug. 26, 2020), available at https://www.sec.gov/newsroom/press-releases/2020-191.
- 4Hester M. Peirce, Statement on Amending the “Accredited Investor” Definition (Aug. 26, 2020), available at: https://www.sec.gov/newsroom/speeches-statements/peirce-accredited-investor-2020-08-26.
- 5Id.
