February 13, 2023
The House Financial Services Committee’s Subcommittee on Capital Markets held a hearing Wednesday morning on “Sophistication or Discrimination? How the Accredited Investor Definition Unfairly Limits Investment Access for the Non-wealthy and the Need for Reform.” The hearing focused on proposals to expand the way individuals can qualify under the SEC’s accredited investor definition.
Chair Ann Wagner (R-Mo.) stressed the need to expand the ways in which Main Street investors can access opportunities usually only available to the wealthy or highly educated. She stated, “Congress must modernize the outdated accredited investor definition and expand the number of individuals who qualify as accredited investors to open up more funding opportunities for all entrepreneurs.” According to her, private offerings are often a more cost-efficient way for smaller companies to raise capital compared to IPOs, but they have their own challenges because the accredited investor definition limits the pool of investors.
Ranking Member Brad Sherman (D-Calif.) argued that there must be an appropriate blend of investor protection and access to capital. He stated that the accredited investor definition needs improvement and expressed concern with the use of net worth as a test of sophistication. “What we could do,” he stated, “is change the definition of accredited investor to the following standards: someone who’s investing less than 5 percent of their net worth in a particular investment; someone who by virtue of their own licenses and [qualifications] is a sophisticated investor; or someone whose advisor is sophisticated, but that advisor needs to be a fiduciary, truly independent, not receiving a commission, and not expecting to get a referred business from the promoter….”
While Republican members were unanimous in support of expanding the accredited investor definition, Democrats were more mixed in their views. Some Democrats advocated expanding access to investment opportunities, while also raising concerns about the weaker investor protections in the private markets. Rep. Wiley Nickel (D-N.C.) expressed interest in allowing investors to qualify based on a sophistication test administered by the SEC. Others came out more directly in opposition to expanding the definition.
The IAA will work with the committee members and staff to develop legislation ensuring that clients of fiduciary investment advisers qualify as accredited investors.
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