Accredited Investor Limits Should Not Change

Accredited Investor limits should not change.

The gulf between Securities and Exchange Commission Chair Gary Gensler’s rhetoric and the results of his leadership continues to widen. Mr. Gensler boasts fealty to working families in interviews and speeches yet thwarts their ability to climb the economic ladder.

The SEC may raise the accredited investor (AI) net-worth threshold from $1 million to $10 million, Bloomberg reports. Because of their wealth or other sophistication criteria, AIs may invest in private companies in ways others may not.

In December, the Commission indicated it would review the threshold “to more effectively promote investor protection,” in a little noticed regulatory agenda document. The scope of the proposed change apparently just became known. The Commission will seek public comment in April.

Raising Accredited Investor limits would harm startups in the middle of the country

The problems with this proposed change are countless. First, it would lessen opportunity for both investors and entrepreneurs. Most startups, especially in scaling industries like technology seek investment first from AIs under Regulation D 506(b) (Reg D). Raising the bar for who qualifies as an AI means less startup funding. And it would have disproportionate geographic and demographic consequences falling hardest on regions and entrepreneurs already struggling for funding.

Wealth in the United States and thus access to capital is mostly confined to a few elite coastal zip codes. Raising the accredited investor threshold would further solidify these venture-capital meccas. As described in a recent SEC Small Business Capital Formation Advisory Committee, which recommended expanding not contracting AI criteria.

Indeed, the Commission should question the whole concept of AIs. It excludes most Americans from participating in higher risks and higher rewards startup funding. Professor Usha Rodrigues calls this securities law’s ‘Dirty Little Secret’:

The dirty little secret of U.S. securities law is that the rich not only have more money-they also have access to types of wealth-generating investments not available, by law, to the average investor. . . .

[C]urrent law . . . discriminates on the basis of wealth, as a proxy for sophistication, or the ability to fend for oneself. Securities law thus in theory, as in practice, marginalizes the average investor without acknowledging that it does so, let alone justifying it.

Accredited Investor limits entrench social stagnation

In practice the rich get richer via access to the most promising companies when prospects fir massive returns are biggest. Raised thresholds would mean even less people would have the chance at generational wealth.

Yet raising the AI thresholds would not only harm the rich, its aftereffects would stymie the entire private investment market. The only way retail investors can currently play in the private markets is through Regulation Crowdfunding (Reg CF). In March 2021, the SEC loosened some Reg CF restrictions to make it more attractive. One move was to remove the investment cap for AIs. This allowed small money to follow smart money into Reg CF. Thus, an AI could place a bit bet on a startup and lots of retail investors could join that bet on the same terms. Raising the AI threshold will mean startups will get less traction with big investors. And retail investors won’t benefit as much from large investor due diligence.

Supporters of tighter restrictions like some state Attorney Generals and the North American Securities Administrators Association, justify raising the AI threshold on the basis of some fraudulent issuers. But this claim fails scrutiny. Accredited Investors use Reg D and Rule 144A. These two markets dwarf the public markets which raised $1.2 trillion. Reg D alone outpaced the public market (registered offerings) in 2019 with almost $1.5 trillion. These numbers would be impossible if investors feared fraud.

The crypto revolution has destroyed the rationale for Accredited Investor limits

The crypto revolution has also refuted arguments restricting the private markets. The Commission recently settled with virtual marketplace BlockFi for $100 million dollars. As Commissioner Hester Pierce stated, BlockFi had always paid out its promised returns so it’s hard to say who Mr. Gensler was protecting. If the end result is savers receive anemic rates the heavily regulated banking industry pays instead of the comparatively gargantuan returns of BlockFi, working families will clearly lose.

In fact, crypto shows the folly of artificially restricting anyone’s ability to invest in non-fraudulent assets of their choice as articulated by podcaster Nathan Whittemore:

[W]e need to be a lot more careful about who we view as someone who needs protection. In the [Elizabeth] Warren-Gensler mindset, anyone who is not an institutional investor needs to be protected. That may make sense to Gary who made $120 million off his time at Goldman. And in other parts of the very, very walled gardens of traditional finance. But it simply isn’t the case, when “retail” spent the last decade kicking the ever-loving s**t out of institutional investors in one of the biggest wealth creation moments in history. Maybe we think a little bit before we lump all retail investors into some paternalistic bucket of little guys who need protection. In fact, it is the first time in history that this was possible because crypto’s permissionless nature inherently obliterates barriers to entry. In other words, the first time in history that retail investors weren’t structurally pushed out or denied access to an investment opportunity. They completely beat nearly every professional investor to it.

Gary Gensler is not our daddy

Under Mr. Gensler the Commission has sought to “promote investor protection” with nary a thought to its utility or secondary effects. His dismal record on crypto, constant push for more power, belies any notion his results help those he purports to protect.

By Jossey PLLC

This post originally appeared on the blog of the Competitive Enterprise Institute

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