WASHINGTON, D.C. – Today, U.S. Senators Thom Tillis (R-NC) and Catherine Cortez Masto (D-NV) introduced bipartisan legislation that would expand the number of Americans who are allowed to invest in our nation’s small businesses by allowing individuals who have relevant education, professional expertise, and other credentials to invest in private offerings.
Under current law, an individual must be deemed an “accredited investor” to invest in a private offering of securities, but under the Securities Act of 1933, an “accredited investor” is defined by an individual who earns more than $200,000 per year or has a net worth of $1 million. As a result, the stringent requirements do not allow individuals who might have the professional expertise the opportunity to invest in companies because of their economic standing.
This critical legislation allows people who have subject matter expertise, regardless of how much money they make or how much money they have in their bank account, to invest in our nation’s small businesses. The Fair Investment Opportunities for Professional Experts Act would amend the definition of “accredited investor” to include individuals who have currently have a securities-related license or an individual who the U.S. Securities and Exchange Commission (SEC) determines has demonstrable education or job experience to qualify as having the requisite subject-matter knowledge to participate in a private offering of securities.
“The majority of new jobs are generated by companies less than five years old, and we must reduce the bureaucratic red-tape and allow these companies to receive financing by people with the appropriate expertise,” said Senator Tillis. “This bipartisan legislation will expand the universe of people who can invest start-up companies and the like, to people who have subject-matter expertise and not just wealth, and will allow small and emerging companies to continue to grow and produce jobs.”
“This legislation helps companies grow by expanding the investor base eligible to buy shares in their firm,” said Cortez Masto. “ At the same time, the bill modernizes SEC guardrails that haven’t been updated in more than 30 years in order to better protect investors.”
Under current law, companies are required to register with the SEC prior to raising funds through public and private offerings. The Securities Act of 1933 contains certain exemptions from registration and authorizes the SEC to provide additional exemptions. Regulation D, which the SEC promulgated to provide such exemptions, is based on the Securities Act provision stating that the obligation to register with the government does not apply to any transaction by an issuer not involving a public offering. The Supreme Court has previously ruled that an offering would be considered private and not public when “the particular class of persons affected needs the protection” of securities laws and should be utilized only by persons who can “fend for themselves.” To further define individuals who can “fend for themselves,” the SEC adopted the term “accredited investor.”
Under the SEC’s standards, an investor’s financial status is a proxy for his ability to fend for himself. As it currently stands, a natural person is an accredited investor if that person (1) earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or (2) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
In 2015, the SEC’s Investor Advisor Committee (Committee) recommended changes to the definition of accredited investor to allow additional investors to participate in private offerings even if they do not satisfy the net worth test, so long as they have the appropriate risk appetite and ability to understand the private offering. The Committee suggested that individuals could be accredited investors if they had adequate financial sophistication, education or professional credentials, or expertise as demonstrated by the successful completion of an exam demonstrating their investment knowledge. S. 2756, the Fair Investment Opportunities for Professional Experts Act, expands the definition of an accredited investor to include persons who meet certain financial education and professional expertise standards.
The House passed similar legislation, H.R. 1585, by a vote of 58-2 in the House Committee on Financial Services, and by a voice vote out of the full House.