By Rodney F. Tonkovic, J.D.
Investor Choice Advocates Network has submitted a petition asking the SEC to reduce the DEI barriers for accredited investors under Securities Act Rule 501(a). To do so, ICAN seeks replacement of the rule's net worth and income requirements with non-financial metrics. The petition argues that Rule 501(a)'s net worth and income requirements have kept "communities of color" from making their own risks assessments and have led to the underrepresentation of people of color in the investment industry in general.
Rule 501. Rule 501 provides accredited investor status to a person whose individual or joint net worth exceeds $1 million (not including the value of a primary residence) or whose individual income is over $200,000 (or joint income over $300,000). Section 2(a)(15) of the Securities Act defines "accredited investor," as relevant here, to mean any person considered to be a sophisticated investor, knowledgeable, experienced, and capable of bearing the economic risk of participating in unregistered offerings. The definition of accredited investor was most recently amended in August 2020, but changes have been considered since that time, and the current rulemaking agenda includes seeking public comment on updates to the financial thresholds in the definition.
Metrics. ICAN argues that people who do not meet the definition's net work or income requirements are simply excluded from most private securities offerings. This creates barriers to investing having a disproportionate impact on communities underrepresented in capital markets, ICAN says.
The petition argues that the current financial requirements should be replaced with non-financial metrics so that investment opportunities in private share offerings may include more underrepresented and diverse communities. ICAN suggests metrics including: education attainment certifications (e.g., high school diploma or equivalent; associate, bachelors, masters, or doctor of philosophy degrees or professional certifications such as those required for certain professions; or evidence that an investor is working with a registered investment advisor.
Negative effects of current requirements. The petition maintains that while the current requirements may have been rooted in the desire to protect investors from making financially risky decisions, the rules also prevent "such individuals, and particularly communities of color, from being able to make their own risk assessments and attempting to accrue wealth at a high level." ICAN argues that businesses targeting consumers of color would likely receive more money from a more diverse pool of investors which would benefit the companies and foster innovation. In addition, financial technology has made the current rule obsolete. The petition points out that technology has made it feasible for issuers to accommodate a large number of micro-shareholders, allowing smaller investments with a correspondingly lower risk.
The rulemaking petition is No. 4-796.