hand counting money representing accredited investor

Legislation aimed at increasing access to investment opportunities for all individuals regardless of their income or wealth level passed the House recently on May 31, 2023. H.R. 2797, or, the Equal Opportunity for All Investors Act of 2023, shares the name of a similar bill that never made it past the House after its introduction in 2021. H.R. 2797 was referred to the Senate Committee on Banking, Housing, and Urban Affairs on June 1, 2023. The Securities and Exchange Commission (SEC) limits participation in certain unregistered or private securities transactions to individuals and entities that qualify as “accredited investors.” An accredited investor has the level of financial or business sophistication required to fully appreciate the risks associated with investments of that nature.

SEC accredited investor qualifications before H.R. 2797

Historically, the criteria for an individual to qualify as an accredited investor under the Securities Act of 1933 was a purely financial analysis: excluding the value of your primary residence, do you have a net worth of at least $1 million? Or, do you have an annual income of at least $200,000 individually or $300,000 jointly with a spouse? If you could answer yes to either of those questions, you could qualify as an accredited investor.

The SEC expanded its definition of accredited investor in 2020 to include individuals with certain professional certifications, employment experiences or relationships. However, even with the expanded definition, a significant portion of the population is still excluded from entire categories of investment opportunities, including private equity and hedge funds.

H.R. 2797 introduces exam to certify accredited investors

H.R. 2797 seeks to change this by directing the SEC to establish an exam through which individuals, who may not otherwise meet the criteria, can become certified as accredited investors. The proposed exam would test an individual’s competency and understanding of “…aspects related to investing in unregistered securities, private companies, or private funds.” Additionally, the bill prescribes that the exam be designed “…with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail.”

If enacted, the SEC would have 180 days to establish the exam, and 180 days after that for the Financial Industry Regulatory Authority (FINRA) to begin administering and offering the exam to the public free of charge. The addition of an alternative pathway for achieving accredited investor status beyond wealth would open up investment opportunities to a much broader population and has the potential to significantly change the landscape of the investment industry, promoting greater accessibility and inclusivity for all individuals. The resulting increase in the pool of available investors would hopefully provide avenues for promising start-ups and small businesses to secure the necessary capital to grow and thrive.