House Passes Bill to Expand Accredited Investor Definition

The U.S. House of Representatives has voted for the Fair Investment Opportunities for Professional Experts Act (H.R. 3394), led by French Hill, R-Ark., chairman of the House Committee on Financial Services.

The bill, which passed 397-12 with strong bipartisan support, would expand accredited investor eligibility to individuals with certain licenses, education or job experience – both broadening access to alternative investments and supporting capital formation.

Those who are currently licensed or registered as a broker or investment adviser in good standing would qualify under the bill. Regarding “demonstrable education or job experience,” the bill would mandate that the U.S. Securities and Exchange Commission create regulations, also verified by a self-regulatory organization like the Financial Industry Regulatory Authority, i.e., FINRA. This could include professionals with relevant financial expertise, even if they don’t meet the wealth or income criteria.

The bill, if signed into law, also directs the SEC to revise the definition of “accredited investor” in Regulation D to conform to changes in this bill.

Historically, the definition has been based on financial thresholds, including income and net worth requirements, with the idea that individuals meeting these thresholds are financially sophisticated enough to understand and bear the risks associated with unregistered securities offerings. Generally, the guidelines, pursuant to Rule 501 of Regulation D of the Securities Act of 1933, have required an individual to meet at least one of two criteria:

• A net worth exceeding $1 million, excluding the value of their primary residence, either individually or jointly with a spouse; or
• An annual income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000) and a reasonable expectation of maintaining the same income level in the current year.

The SEC made several amendments to the definition over the years, most recently in August 2020, expanding the categories of who qualifies. These changes included recognizing:

• Individuals who have certain professional certifications and designations;
• Individuals who are “knowledgeable employees” of private funds, but only in regard to that specific fund;
• SEC-registered and state-registered investment advisers;
• Individuals who are “family clients” associated with a “family office,” and who meet specific requirements; and
• Directors, executive officers, and general partners of the issuer or of a general partner of the issuer.

Supporters of the legislation, like the Institute for Portfolio Alternatives, believe modernizing the accredited investor definition is long overdue.

“Investors building their long-term nest eggs deserve and need a wider range of options for their money that more closely resemble the options institutional investors have. Bipartisan legislation has been consistently and overwhelmingly advanced by the House of Representatives over the last five Congresses, a sign of the importance and urgency of reform,” said Anya Coverman, president and chief executive officer of the Institute for Portfolio Alternatives – an advocacy organization for the alternative investment industry.

The bill now moves to the Senate for a vote, where it is expected to be received favorably given the Republican control of the chamber and the broad bipartisan support.

If the legislation becomes law, the bill requires the SEC to update its rules within 180 days to reflect these new criteria and gives the SEC some discretion in determining the specifics of how education or job experience will qualify an investor.

Other related bills include Michigan Republican Bill Huizenga’s Accredited Investor Definition Review Act (H.R. 1579) and Nebraska Republican Mike Flood’s Equal Opportunity for All Investors Act (H.R. 3339).

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