Legislation to Expand Accredited Investor Definition Moves to Senate

The Fair Investment Opportunities for Professional Experts Act, H.R. 835, and the Accredited Investor Definition Review Act, H.R. 1579, both passed the House of Representatives on June 5 by voice vote.

The bills would expand the definition of an accredited investor, someone who may invest in private securities. Currently, accredited investors must have a net worth of at least $1 million or an annual income of at least $200,000. Some financial professionals can also qualify.

During a markup hearing for the bills held in April, restricting private securities to only the wealthiest was criticized by more than one representative as being unfair. The ostensible justification for the rule is to protect lower-income households from losing a significant portion of their wealth on one bad investment.

H.R. 835 would permit brokers and investment advisers registered with the Securities and Exchange Commission, Financial Industry Regulatory Authority or a state securities authority to qualify as an accredited investor. It would also allow “any natural person the Commission determines, by regulation, to have demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment.”

The second qualification is intended to permit specialized experts to invest in private securities related to their area of expertise, such as a medical professional investing in a medical device.

Representative Brad Sherman, D-California, proposed adding other expert qualifications, such as an MBA, to the bill, but these qualifications were not added to the version that passed the House.

H.R. 1579 requires the SEC to review the definition of accredited investor every five years, starting 18 months after the bill’s passage. The bill requires the SEC to consider qualifications and credentials that could expand investment without compromising investor protections.

Both bills are now with the Senate Committee on Banking, Housing, and Urban Affairs, which does not yet have a timeline for acting on the legislation.

A third bill which passed the House Committee on Financial Services is the Expanding Access to Capital Act, H.R. 2799. This bill would add clients of registered advisers to the definition of accredited investors, provided they do not invest more than 10% of their net worth or gross income into private securities. This bill has not yet passed the House.