On Sept. 30, the Securities and Exchange Commission (SEC) voted to propose changes to the definition of “accredited investor” under Rule 501(a)(10) of Regulation D under the Securities Act of 1933, as amended (Securities Act). The SEC is considering six new pathways for qualification as an “accredited investor” to expand access to individuals otherwise unqualified to access private securities offerings.

Specifically, the SEC issued notices seeking public comment on the following proposed pathways:

• Passing an “accredited investor” exam to be developed by the Financial Industry Regulatory Authority (FINRA); and
• Holding in good standing one of the following:
  • a license as a Certified Public Accountant (CPA);
  • a charter as a Chartered Financial Analyst (CFA);
  • a certification as a Certified Financial Planner (CFP);
  • a FINRA Investment Banking Representative License (Series 79); and
  • a FINRA Research Analyst License (Series 86 and Series 87).

These additional pathways would expand the historically narrow group of eligible investors in private securities offerings by allowing individuals to qualify as “accredited investors” beyond the traditional income and net worth thresholds (generally, $200,000 of annual income for individuals or $300,000 of joint annual income with a spouse or spousal equivalent, or a net worth over $1 million).

The proposed “accredited investor” exam would be available for individuals aged 18 and older, and would test candidates on their knowledge of various securities topics, including investment risks, corporate governance, structures of securities, regulatory requirements, and more. The exam would be largely modeled on FINRA’s Securities Industry Essentials (SIE) exam and require payment of a fee comparable to the $100 SIE exam fee. Upon passing, it is anticipated that the individual would be considered an “accredited investor,” for a 10-year period. A candidate that does not pass the exam would be required to wait 30 days before retaking the exam (subject to a 180-day waiting period for any person who fails to pass the exam at least three times within a two-year period).

In his statement supporting these proposed changes, SEC Chairman Paul Atkins recognized that investors who hold certain professional certifications, designations, or credentials in good standing should be afforded the opportunities to invest in private securities offerings, as these individuals demonstrate the requisite financial sophistication to participate in such offerings. Furthermore, in her statement, SEC Commissioner Hester Peirce reiterated, “Wealth and income are not always great proxies for an investor’s sophistication.” Thus, in the SEC’s view, these new designations, and an “accredited investor” exam, if adopted, would establish welcome alternative qualification paths for individuals who do not satisfy the traditional income or wealth thresholds.

Taken together, the new designations, along with an “accredited investor” exam, would broaden the group of eligible investors and offer expanded access to diversified investment opportunities. By moving beyond the traditional income and wealth thresholds, these new avenues would open the door for more private market investment opportunities for individual investors. If adopted, these new pathways would represent a significant expansion of the credential-based pathways initially introduced in 2020.

The notices provide for a 60-day comment period upon publication in the Federal Register.

Taft associate Sarah Sim, admission in the District of Columbia pending, co-authored the article.