Debate: Should the SEC Create an Exam for 'Accredited Investor' Status?

Two professors debate a bill that would allow knowledgeable investors to qualify as accredited regardless of net worth or income.

The Securities and Exchange Commission’s definition of “accredited investor” is generally important because satisfying certain criteria allows individuals to participate in private investments that are not otherwise available to the public — usually because of a lack of publicly available information about the investment itself. Currently, individuals must satisfy a net worth or annual income threshold to qualify as “accredited,” or they must hold certain licenses from the Financial Industry Regulatory Authority, such as a Series 7.

A newly proposed bill, the Equal Opportunity for All Investors Act of 2021, would allow more investors to qualify as accredited by directing the SEC to create an exam that would test a person’s investment knowledge and expertise, allowing those individuals to obtain accredited investor status without regard to current net worth and income requirements.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the advisability of using an exam to determine accredited investor status.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes 

Bloink

Their Reasons:

Byrnes: Allowing the SEC to create a targeted exam to determine who qualifies as an accredited investor would go a long way toward opening key investments to investors with the skills necessary to evaluate the risk of the investment. Increasing the pool of accredited investors would also provide additional opportunities for up-and-coming business owners to raise funds and grow the economy as a whole — creating much-needed jobs in the process.

Bloink: Our current accredited investor rules exist for investor protection purposes. They aren’t designed to keep ordinary Americans from making their own investment choices — but instead recognize that some investments are extremely risky and that not everyone should be encouraged to bear these types of financial risk. We must keep the key purpose behind these rules in mind before we fundamentally change the qualification requirements. 

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Byrnes: Today, everyday Americans are generally excluded from many valuable investment opportunities — all because of their generally lower income and net worth. This keeps people out of investments at the precise time when they could potentially make the most money: the growth phase of a newer private company. 

Bloink: Broadening the scope of these rules to allow financially sophisticated but not super-rich investors to participate more fully in risky investments is fine if the investor has adequate information. Under the current rules, there’s no way to really know whether that’s the case. Investments open to accredited investors are typically in private companies that don’t share information publicly to allow taxpayers to make an informed choice regardless of education status, net worth, or any other indicator of investment sophistication. 

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Byrnes: Money and current net worth aren’t always indicators of who has the financial sophistication to make complex investment choices. I don’t think anyone would agree that past financial accumulations necessarily dictate future investment success. Opening the “accredited investor” category to those with demonstrated financial sophistication would benefit everyone involved.

Bloink: Of course, evaluating financial sophistication should be a key element of investor accreditation. However, if we aren’t going to have any income qualification requirements in place to protect investors from severe financial loss, we also need to change the rules more dramatically to ensure that ordinary Americans are protected. That’s why the income thresholds exist in the first place: to make sure that “accredited investors” also have the means to withstand a significant investment loss. Without adequate information guarantees, no amount of financial “savvy” can help — these investment outcomes would be based on luck alone.

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