SEC’s Accredited Investor Definition Challenged in Federal Lawsuit

A new federal lawsuit filed against the U.S. Securities and Exchange Commission is challenging the legality of the “accredited investor” rule, arguing that it unfairly excludes a vast majority of Americans from wealth-building private investment opportunities, and violates the First Amendment.

The complaint was filed in the U.S. District Court for the Northern District of Texas by the Investor Choice Advocates Network, i.e., ICAN – a nonprofit public interest law firm – on behalf of plaintiffs Emily Kapszukiewicz, a healthcare professional, and Healthcare Shares P.B.C., a public benefit corporation dedicated to financing medical innovation, including research on treatments and cures.

The latter operates a venture capital fund, Fund I, a series of Healthcare Shares LP, which focuses on investing in healthcare startups with the goal of having a positive social impact in healthcare and public health.

The lawsuit targets Rule 501 of Regulation D under the Securities Act of 1933, which defines an “accredited investor” as an individual with an annual income over $200,000 for the past two years, or a net worth exceeding $1 million, excluding their primary residence.

The complaint argues that this wealth-based definition is a flawed proxy for investment sophistication and uses the Kapszukiewicz to illustrate this point.

Kapszukiewicz holds a master’s degree in applied economics and has professional experience in strategic initiatives and financial modeling. Given her net worth of approximately $850,000 and annual income of approximately $195,000 and despite her life experience, Kapszukiewicz does not meet the SEC’s financial thresholds to be an accredited investor.

According to the lawsuit, in March and April 2025, Kapszukiewicz sought to invest $25,000 to $35,000 in Fund I, as aligned with the fund’s minimum investment requirement of $25,000. However, she was told she didn’t qualify as an accredited investor under SEC rules.

The lawsuit highlights the irony of Kapszukiewicz’s situation. Although she was barred from investing her own money in the fund, its managers recognized her expertise and appointed her as chief executive officer of one of its portfolio companies, Owl Therapy. In this role, she is qualified to invest in Owl Therapy and is even raising capital from other accredited investors, but she remains unable to invest in the parent fund that owns the company she leads. This, the complaint argues, forces her to concentrate her investment risk rather than diversify it.

According to the complaint, the lawsuit expands its critique beyond Kapszukiewicz’s individual case, making two core arguments against the SEC’s long-standing rule.

For one, the complaint alleges that the SEC, both in its original 1982 adopting release and in subsequent amendments, failed to conduct a “substantive economic analysis” of the rule’s impact on efficiency, competition, and capital formation. It argues that the agency relied on “conclusory assertions” and made no effort to collect data or build economic models to inform its rulemaking. The lawsuit claims that the SEC acknowledged it was “not possible to quantify the impact” while having the resources to do so. This failure to properly analyze the rule’s effects, the plaintiffs argue, makes it arbitrary and capricious.

Further, the lawsuit contends that the SEC’s rule restricts investors’ rights to expressive and associational conduct under the First Amendment. It argues that investing in a fund like Healthcare Shares is not merely an economic act but a form of expression – a way for individuals to support a social mission and associate with a community of like-minded professionals. The complaint claims that the SEC’s financial thresholds are a content-neutral restriction that fails to meet intermediate scrutiny because less restrictive alternatives, such as investor education or sophistication testing, could achieve the same investor protection goals without categorically excluding knowledgeable individuals based on wealth. The plaintiffs argue that the rule “unconstitutionally restrict[s] Plaintiffs’ ability to engage in a form of political, social, and ideological expression through investment.”

Further, the complaint cites data from a 2024 SEC report to demonstrate how the rule disproportionately affects certain demographic and geographic groups.

• Racial and geographic disparities: The complaint points to a significant earnings and wealth gap in America that is reflected in the accredited investor pool. In 2019, while 10.8% of white households earned over $200,000, only 5.3% of Hispanic households and 4.6% of Black households reached that same income level. The lawsuit also notes that in 44 states, an individual can be in the top 10% of income earners and still not qualify as an accredited investor, creating a geographic bias that favors investors in high-cost-of-living areas.
• Limited access to wealth creation: The lawsuit contends that by staying private longer, many companies are past their high-growth phase by the time they become publicly available. The accredited investor rule, therefore, prevents most Americans from participating in the earliest, most lucrative stages of investment.

The plaintiffs argue that the SEC has failed to implement the full range of qualification factors authorized by Congress in 1980, which included “financial sophistication, net worth, knowledge, and experience in financial matters.” They contend that the SEC’s reliance on rigid financial thresholds for the sake of simplicity has created a “two-tiered investment system that reinforces wealth inequality.”

The lawsuit seeks a declaratory judgment and an injunction to set aside the SEC’s rule. The SEC has not yet commented publicly on the complaint.

This lawsuit builds on significant momentum to update the definition of accredited investor. The U.S. House of Representatives passed the Fair Investment Opportunities for Professional Experts Act (H.R. 3394) in June, which would expand accredited investor eligibility to individuals with certain licenses, education or job experience – both broadening access to alternative investments and supporting capital formation.

Other related bill’s 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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