The SEC published a release in July 2019 expanding the definition of an accredited investor. The proposal is called, “Amending the ‘Accredited Investor’ Definition”. This proposal attempts to define and expand those investors who can take part in investing in securities that are not registered as public offerings (i.e., 506(b) and 506(c) offerings). Conceptually, this proposal aims at a change that is long time coming. It is a change that warrants giving our securities regulators congratulations on their good faith actions.
It is my opinion that most of the proposed changes made are sensible and are long overdue.
Allowing professionals with certifications like having a Series 7, 65 or 82 license or knowledgeable employees of a private investment fund seems quite obvious choices for defining who is an “accredited investor.”
The SEC’s recommendation, that limited liability companies meeting certain conditions, as well as registered investment advisors and rural business investment companies possess sufficient knowledge to qualify as accredited investors, is appropriate.
The novel decision to include Indian tribes, family offices and family clients that have in excess of $5 million in assets as accredited investors, also makes sense.
And finally, adding a “spousal equivalent” definition, meaning pooling finances of both spouses, for qualification as an accredited investor, is a category that should have always been part of the definition.
The Glaring Problem – and I confess that as a matter of personal conviction, it is a major problem – is the proposal that an investor who does not otherwise qualify as an accredited investor by traditional criteria should be obligated to take and pass an examination developed by our regulators or self-regulatory organization. In other words, I have angst over the government, or its delegated state actors, having ultimate say over who can and cannot invest in a private offering of securities.
Before we examine what is at stake here, let’s look at the language of the SEC’s proposal:
The proposed amendment would provide the following non-exclusive list of attributes that the Commission would consider in determining which professional certifications and designations or other credentials qualify for accredited investor status:
- the certification, designation, or credential arises out of an examination or series of examinations administered by a self-regulatory organization or other industry body or is issued by an accredited educational institution;
- the examination or series of examinations is designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing; (Emphasis supplied)
- persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and
- an indication that an individual holds the certification or designation is made publicly available by the relevant self-regulatory organization or other industry body.
It is the second “bullet” that, to me, is troublesome because it seems to distinguish between examinations that securities professionals take (for instance, the Series 7 so- called “broker’s” exam and the Series 65 / 66 exams so-called “investment adviser” exams) in order to become a securities “broker” and/or “investment adviser” professional versus a new sort of examination that, inferred from the language above quoted from the SEC official release, an investor (who is not wanting to become a “broker” for or an “adviser” to anyone else, but who) is simply wanting to invest in his own right with the aid of someone who already is a Series 7 broker.
The main point, here, is that this is the first instance that I am aware of that an agency of the federal government has taken the stance that the government claims the right of deciding who can invest and who cannot invest.
I have tremendous respect for regulators, especially for the SEC, because I believe that recent pronouncements by the SEC demonstrates that it is striving very hard to live up to is obligation, legislated by Congress, to be the regulator whose single most important focus is developing America’s capital markets within the boundaries set forth by the Securities Act of 1933 and the Exchange Act of 1934.
That said, this proposal – that a government agency create an exam that an investor must take and pass in order to “pass Go” and be allowed to invest in a private placement – invariably gives rise to Big Brother not only watching, but also controlling a civilian investor’s investment strategies.
I do appreciate the fact that the SEC’s intent is a good one: In effect, the SEC is saying, “We want to protect you, the investor, when we, the regulators (including FINRA), believe you do not know what you’re doing, notwithstanding your willingness to take an investment risk that the SEC and FINRA may deem to be unwise for you.”
There is no doubt that the recommendation for a government-agency-created- examination to qualify an individual as an accredited investor intends the public good. But good faith and well-meaning intentions are not the issue here.
If I may paraphrase Alexander Hamilton’s insight in Federalist 71: There are many, including government agencies, who “INTEND the PUBLIC GOOD”; but, intending the public good does not always give rise to “RIGHT REASONING about the MEANS for promoting” the PUBLIC GOOD .
And so, the central concern here surrounding this proposal for a government-agency- created-examination to qualify an individual as an accredited investor, is actually a constitutional one, namely, whether it is within the lawful power of government – whether exercised by the courts, the Congress, or the Executive and its government agencies – to decide who can and who cannot invest, that is, take risks, in the securities markets.
Surely, we need to have regulations and definitions. But once a government agency (or, for that matter, any self-regulatory organization that is supervised by a government agency) determines (1) what an investor’s credentials should be and (2) what an investor may or may not invest in, It strikes at the heart of our American System: Who is running your financial life? You or Big Brother!
The American System is premised on the idea that government’s only role is to protect individual rights and that the right of government to intervene in an individual’s life is premised on ensuring equality among individuals to create wealth, limited only by the individual’s ability and initiative. The creation of a government- agency-created-examination to qualify an individual as an accredited investor, in effect, creates inequality because this proposal creates a single, central portal at which some citizens (who are not lawyers, accountants, and financial services professionals) must present his or her passport in order to gain entry into the American capitalist system. Those who do not pass the government exam are denied entry. This is a “first” in the long history of investor Independence from government interference.
I find it essential to repeat: This is not a personal attack on the SEC. Rather, it is the voice of one crying out in the wilderness advocating protection of our American Capital Market System to anyone who will thoughtfully consider the serious ramifications of this proposal.
Once we have regulators, not investment professionals or knowledgeable qualified investors determining who can invest, we are going down a slippery slope.
Damon D. Testaverde, Chairman