Americans for Tax Reform supports Rep. Mike Flood’s (R-Neb.) bipartisan Equal Opportunity for All Investors Act of 2023 (H.R. 2797).
On May 31, 2023, H.R. 2797 passed the U.S. House of Representatives by a large bipartisan margin of 383-18. Now, the bill awaits action in the Senate. ATR encourages all senators to support this legislation, so that more individual investors may gain access to investment options that are currently restricted to “accredited investors.”
H.R. 2797 would improve the status quo by amending the definition of an accredited investor to broaden the pool individuals who can qualify for investment in private markets. To invest in private offerings of securities that are unregistered with the Securities and Exchange Commission (SEC), investors must qualify as accredited. Private placements, or offerings exempt from SEC registration under Regulation D of the Securities Act, are used to raise capital for investment in alternative assets, such as real estate, private equity, hedge funds, derivatives, and art.
The bill, if enacted, would allow individuals to take a knowledge exam established by the SEC and supervised by the Financial Industry Regulatory Authority (FINRA), to become an accredited investor, rather than relying on the current criteria, which is based on income, net worth, and employment in a financial profession.
According to the committee report published by the House Committee on Financial Services, the bill would require:
that the examination be designed with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail and may include methods to determine competency with respect to different types of securities, disclosure requirements under the federal securities laws, corporate governance, financial statement, aspect of unregistered securities, potential conflicts of interest between financial professionals and their clients, and other criteria the SEC determines necessary.
The bill also “requires that the examination be offered free of charge to the public.”
What is an accredited investor?
An accredited investor can be either an individual or institution that is deemed to possess a certain level of financial and investment knowledge by the SEC under Regulation D and does not require the same protection provided by SEC regulations. Accredited investors are allowed to trade securities that are not registered with the SEC. Institutions, such as broker-dealers, banks, insurance companies, investment companies, and investment advisers are considered accredited investors. Corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family office” and any “family client” of that office may also qualify if they hold at least $5 million in assets.
Additionally, individuals with a net worth or joint net worth of at least $1 million (not including home equity) or an annual income of at least $200,000 (or $300,000 of joint income) will qualify. Individuals can also qualify as accredited investors if they are financial professionals who have passed the Series 7, 65, or 82 exams.
Ostensibly, these requirements are in place to protect individuals who may not possess sufficient investment “sophistication” from fraud. However, the current system favors the wealthy and financial professionals.
Why the need for H.R. 2797?
Widening the pool of individual investors for the private markets based on knowledge and merit alone would greatly democratize investing. One of the investment options restricted to accredited investors, private equity, mainly invests in small businesses. Small businesses, which employ no more than 500 employees, are the backbone of the American economy, making up 99% of all U.S. businesses. According to an EY report, “In 2022, the median [private equity]-backed business employed 69 workers.” Additionally, in 2022, 85% of all private equity-backed businesses were small businesses. Creating a bigger pool of investors for this exponentially growing market is imperative for the advancement of the U.S. economy.