Friday, December 01, 2023

Commissioners highlight promises and pitfalls of revising accredited investor definition

By Anne Sherry, J.D.

In remarks before an advisory committee meeting Wednesday, SEC commissioners expressed their hopes and concerns about the possible amendment of the accredited investor definition. While Chair Gary Gensler suggested that the SEC not erode the investor protections embedded in the securities laws, Commissioner Hester Peirce said that regulators, however well-meaning, should not impede investors’ freedoms. Commissioner Caroline Crenshaw drew a connection between the definition and the committee’s second topic, diversity, by warning that eroding investor protections may disproportionately harm underserved communities.

The Small Business Capital Formation Advisory Committee met to discuss the accredited investor definition and diversity and the investment process. Members of the Committee heard remarks from CorpFin’s Kenisha Nicholson on the current accredited investor framework, including background information on the accredited investor definition and how the definition interrelates with capital-raising rules, before sharing their own views and experiences. In the afternoon session on diversity in investment, the Committee heard from Anna Snider (Bank of America) on how diversity metrics are incorporated into the investment process.

Gensler. In remarks before the meeting, Gensler returned to a favorite topic: the “basic bargain” embedded in the securities laws, whereby public companies are required to disclose certain information, and investors are then free to decide whether to take on the risk of investing. Congress’s recognition that some investments should be exempt from registration gave rise to Regulation D and its accredited investor definition. Any discussion about this cornerstone definition raises the question of “when is it appropriate that investors get—or not get—that full, fair, and truthful disclosure that Roosevelt worked with Congress to embed in the securities laws,” Gensler said.

Gensler also tied the diversity topic to the SEC’s mission. All companies deserve access to the capital markets, and with respect to the SEC’s mission to maintain fair, orderly, and efficient markets, “fairness literally is embedded in our mission,” he noted.

Peirce. Peirce also couched her remarks in the context of larger goals. “Relevant to both of your discussions today is the way our capital markets intertwine with who we are as an American people,” she said, and this means a commitment to freedom. She cautioned that the SEC must not impede the freedom to build businesses and invest in others’ businesses. “Americans should be able to invest and build wealth without having to convince regulators—even those operating with a protective impulse—that they are sophisticated enough or rich enough.”

Peirce had several more concrete comments about the accredited investor definition. She observed that the SEC has previously suggested that qualifying professional credentials could provide a means of achieving accreditor investor status and asked the Committee to consider whether other marks of sophistication might be considered as well. As examples, she mentioned the completion of investor education certification programs, college courses on investment, and degrees in certain fields.

Crenshaw. Finally, Crenshaw highlighted two areas of particular interest for discussion. Despite a strong increase in wages, the accredited investor threshold has been the same since the 1980s. The Committee suggested 18 months ago that these financial thresholds should be indexed for inflation, and given the wage gains seen post-COVID, that suggestion is even more relevant now than it was only a year and a half ago. But this should not be done at the expense of basic investment protections, and requires balancing to “avoid creating an alternative that turns into an ever-widening loophole.”

Second, Crenshaw drew the Committee’s attention to another advisory committee’s recent report on firms’ use of digital engagement practices. In this report, the Investor Advisory Committee cited a study finding that increased participation in the markets by new investors, who are more racially and ethnically diverse, has led directly to increased losses. Crenshaw expressed concerns about exacerbating the already enormous wealth gap by exposing new investors to increased risks. Here, she quoted testimony from Professor Gina-Gail Fletcher, who told the House Financial Services Committee in February, “If the scope of the accredited investor definition is broadened, this will expand the opportunities for wealth extraction and amplify wealth inequality in the country.” In a similar vein, Michael Canning (LXR Group, LLC) recently asked the Investor Advisory Committee to be skeptical of arguments that relaxing investor protections will benefit underserved communities: “Often, underserved communities benefit significantly and even disproportionately from the protections afforded by regulation.”