Unlocking Capital – at Scale – Is Good for Everyone
Yesterday, Wednesday Nov. 29, the SEC’s Small Business Capital Formation Advisory Committee met to deliberate on topics including what it means to be an accredited investor. Supporters argue that it is high time for a revised definition, as the current one has not been updated since 1982. Others suggested it will help achieve gender parity and diversity while providing a platform for retail investors who are smart enough to understand the risks of private placement, yet excluded due net worth thresholds. Setting limits on the percentage of an investor’s assets that can be allocated to private securities, increasing disclosures by issuers and enhancing investor education were other ideas discussed by the Committee, which could make a formal recommendation to the SEC at its next meeting in 2024.
Surprisingly, there is no formal process for becoming an accredited investor but for companies raising capital, the definition plays a pivotal role in shaping the pool of potential investors.
Currently, accredited investors must meet the following requirements:
A net worth over $1 million, excluding primary residence and an income of $200,000 (individually) or having an income of $300,000 (with a spouse or partner) for the past two years with the same expectation for the next year.
Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82).
Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company).
An entity owning investments in excess of $5 million such as corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family office” and any “family client” of that office.
SEC or state-registered Investment Advisor or SEC-registered broker-dealer.
A financial entity such as a bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company.
Easing the requirements was partly the goal of yesterday’s meeting. Back in May, the House approved legislation directing the SEC to implement an examination program, administered by FINRA, aimed at accrediting investors with lower levels of wealth. The exam would gage a potential investor’s level of financial sophistication, comprehension of investment principles and capacity to make well-informed decisions bypassing the SEC’s current ‘wealth-based’ test.
The goal of the new regulatory measure is to foster a more transparent and equitable investment environment, and may mobilize gender-lens investing in private placements. This idea embodies the broader philosophy that "gender-smart" investing - a term credited to 2X Global - holds significance for social, financial, and business outcomes, in part because financial systems interact with and benefit women differently.
Diversified capital pools hold enormous potential for positive societal impact. The most immediate impact lies in enhancing access to capital for traditionally underfunded companies facing higher costs due to gender, race, or socioeconomics biases. Redefining what it means to be an accredited investor and requiring exams for those under certain income or wealth thresholds not only expands the pool of funding sources but also strengthens a more inclusive and robust financial ecosystem, supporting the growth of all businesses. When it comes to accessing capital, it is well documented that ethnically diverse and underfunded businesses face very unique challenges. Factors may include limited knowledge or professional access to traditional funding networks.
The SEC’s Small Business Capital Formation Advisory Committee has the opportunity to actively address and advocate for reforms around the definition of accredited investors and diversity in the investment process. By recognizing a broader range of qualifications beyond traditional wealth metrics, the committee can and should contribute to creating a more equitable investment landscape.