With the increased focus on the lack of access to capital in certain communities, and the generational impacts of such deficit, the SEC’s expanded definition of accredited investor takes a step in the right direction, but does not go far enough to expand the pool of participation for private investors.
Under Regulation D of the Securities Act, the category of an accredited investor is created to delineate an investor sufficiently sophisticated to understand the risk of investing, and therefore in less need of the protection afforded by the Securities Act of 1933 and the rules promulgated thereby (the “Securities Act”). The Securities Act makes such delineation by defining categories under which investors would qualify as accredited. The category with which most individual investors interact relates to the income and net worth requirements whereby an individual who (i) has made $200,000 in the past 2 years ($300,000 if married), and is expected to continue making such amounts, or (ii) has net worth of $1 million dollars (not including their primary residence) are deemed to be accredited investors. Under Regulation D of the Securities Act, this designation, provides exemptions from registration and serves to lower the regulatory requirements required to raise capital from such individuals. As such, as practitioners are well aware, issuers of such securities often limit their capital raising efforts to accredited investors.
While well intended, to protect unwary investors from being taken advantage of and investing in opportunities in which they cannot bear the economic risk, the accredited investor formulation also has the double-edged effect of excluding otherwise savvy investors from an important tool of capital raising. This reality is particularly detrimental to the very communities that have been underinvested in. It should come as no surprise, considering the historical impacts of discriminatory laws that have served to stunt their ability to accumulate wealth that African Americans, even sophisticated professionals, make up a very small fraction of accredited investors. Based on publically available numbers, using the accredited investor criteria of a single individual making greater than $200,000, in no state do African Americans comprise greater than 8% of the accredited investors of such state -- Maryland (7.6%), California (6.0%), New York (5.9%), and Oregon (6.6%) lead the pack.
Seemingly out of a recognition that the existing definition limited access of otherwise savvy investors, the SEC expanded the definition of an accredited investor to one based not only on income and net worth, but one based on knowledge. Specifically, the SEC expanded the definition of an accredited investor to include (i) holders in good standing of a Series 7, 65 or 82 licenses, and (ii) knowledgeable investors in a private fund. While this knowledge-based expansion goes in the right direction, the limited subcategory of those now included as accredited investors does not go far enough to afford otherwise savvy investors, with the ability to participate in these private offerings. The practical implications of this limitation is that individuals who are otherwise capable of bearing the economic risk of investment opportunities, continue to be limited in their opportunities for such investment, and so too are the communities and projects that could otherwise benefit from the ability to aggregate capital. It remains true that wealth begets wealth, but only when individuals are permitted to participate in the mechanisms for wealth generation. Unfortunately, the expansion of the accredited investor definition does not go far enough to free the shackles of available capital available to be released into and from certain underinvested communities.