It may sound trivial, yet how we define accredited investor (AI) is critical. Among other things, U.S. securities laws and regulations make it easier for AIs to invest in privately held companies through “exempt offerings,” which are offerings not “registered” under the 1933 Securities Act. This results in AIs having investment opportunities that are unavailable to non-accredited investors (non-AIs). Moreover, the amount raised in exempt offerings has been increasing both absolutely and relative to the amount raised in registered offerings. In fact, the Director of the SEC’s Division of Corporate Finance recently indicated that “[c]ompanies raised $2.9 trillion in private markets [in 2018], compared to $1.4 trillion in public markets . . . .” The importance of making more exempt offerings available to current non-AIs is frequently noted. Further, the pool of capital available to new ventures is essentially limited to the amount AIs are willing and able to invest. This is because it is too expensive for new ventures to participate in registered (i.e., public) offerings. It is also well established that these entrepreneurial ventures, which frequently need additional capital, have a significant impact on our economy. Thus, converting current non-AIs into AIs would create new investment opportunities, provide a much needed source of capital for entrepreneurial ventures, and have an economic impact.
To date, the AI definition has ignored the sophistication of individual investors. Instead, it has focused solely on one’s net worth and income. Commentators, including the SEC, have repeatedly noted potential shortcomings with this approach. But, the need to protect investors has provided the justification for tolerating these shortcomings. This Article argues that AI should be redefined to welcome investors who demonstrate an ability to fend for themselves by passing a relevant exam. More specifically, Part II of this Article reviews the current AI definition and population. Part III provides examples of how the AI definition impacts investments in private companies and the secondary trading of such securities. Part IV summarizes recent proposals to expand the current AI definition. Finally, Part V takes an in-depth look at one of the proposals: letting investors test into AI status. Part V also explains how such an exam could be linked to two other responsible ways to expand the AI pool: putting investment limits on AIs and recognizing the value of experience gained by actually investing in exempt offerings.
Redefining Accredited Investor: That's One Small Step for the SEC, One Giant Leap for Our Economy,
Mich. Bus. & Entrepreneurial L. Rev.
Available at: https://repository.law.umich.edu/mbelr/vol9/iss2/2