We can do more for the 90 percent — time to fix the ‘accredited investor’ regulation

As our nation enters the post-pandemic age, many Americans are concerned about the future. The price of everything — gas, housing, and groceries — is soaring. Small businesses, the engine of economic growth, are facing a looming recession. If this country is going to emerge from the economic mess created by the current White House and beat China for the next 50 years, we must start by making it easier for small businesses to get the capital they need to succeed and allow more Americans to share in that growth and the prosperity of our markets, not just the wealthy.

We’re working in Congress to do that, based on what we learned from our combined years of experience helping Americans save for retirement and achieve financial security. Our past work has made it easier and less expensive for people to invest in public companies. Innovations like commission-free stock trading, low-cost brokerage accounts, and diversification through index funds are the result of smart, bipartisan legislation.

But due to outdated regulations from the Securities and Exchange Commission (SEC), most Americans are prohibited from investing in a wide variety of businesses. Unless you’re rich enough, or what’s called an “accredited investor” — meaning you make more than $200,000 a year or are worth at least a million dollars — you’re only allowed to invest in our public markets. Meanwhile, new businesses are staying private for longer because bad policy from Washington has made it increasingly expensive for companies to become and remain public. There are now half the number of companies in the stock market today compared to 20 years ago, which means fewer options for everyday investors who are limited to the public markets. That means over 90 percent of households don’t get a chance to invest in the next Google or Tesla while they’re still a startup, or in the very things many on the left demonize for making a lot of money, like private equity and venture capital.

That’s not fair. And it’s not smart. The current accredited investor rules favor the rich and affluent and, in our view, effectively discriminate against the poor and minority communities. The SEC estimates only 1.3 percent of accredited investors are Black and 2.8 percent are Latino, even though they make up nearly a third of all Americans.

At a time when your bank account is yielding less than one-tenth of one percent, we believe more people should have the opportunity to invest in opportunities that our regulators have reserved for the wealthy for decades. The Biden administration and Democrats like to talk about inclusivity, reducing income inequality, and the Black wealth gap. If they were serious about economic opportunity, one of the easiest but impactful reforms would be to modernize the SEC’s “accredited investor” definition and get big government out of the way of people investing in their communities and new businesses. Republicans are committed to improving our financial system to not only protect retail investors, but also to support our entrepreneurs and democratize investment opportunities for everyone.

Let’s be clear, investing in the private markets can be risky due to the limited opportunities to sell, usually higher fees, and less standardized reporting and disclosure compared to the public markets. These are some reasons why investing in things like startups and real estate projects have been limited to accredited investors. But it’s important to remember that core disclosure and anti-fraud protections under federal securities laws have always applied to private market investments, just as they have to public markets ones. There are commonsense and easy changes that can move the opportunity needle without adding risk. Former SEC Chairman Jay Clayton got the ball rolling by allowing individuals with certain financial certifications to be accredited investors. He also gave the Commission the ability to designate additional qualifying professional certifications, designations, and other credentials.

While current SEC Chairman Gary Gensler could use this authority to bring more retail investors into the private markets safely, he’s too busy being the environmental czar, including forcing public companies to disclose his preferred greenhouse gas statistics even though they can’t be collected and have no relevance to investing decisions. What’s worse, it appears Gensler is requesting public comment on the accredited investor definition, presumably to make it even more difficult for most Americans to qualify. In response, the SEC’s Small Business Capital Formation Advisory Committee expressed concerns that raising the financial thresholds could have disproportionate impacts on various demographic groups, making the definition less inclusive and widening the nation’s already wide racial wealth gap. The Advisory Committee also argued that a homogeneous pool of accredited investors would negatively impact the diversity of entrepreneurs who raise capital, decreasing inclusion in capital formation.

We agree. We can increase small business access to capital and give all informed investors, regardless of wealth, access to crucial private market opportunities. As Clayton remarked, “Congress and the SEC have taken a number of steps to expand Main Street investors’ access to certain aspects of our private capital markets with appropriate protections.” This has been successful and it’s clear our government should stop impeding the potential for a more robust, inclusive economy powered by small businesses and Main Street investors.

Gensler already has some of the authority he needs to get more investors access to the private markets to grow their wealth and provide capital for growing companies. And Congress can do even more to expand retail access to the private markets responsibly. House Republicans like French Hill, Patrick McHenry, David Schweikert, and Rodney Davis have all introduced legislation that would expand opportunities for prospective investors and entrepreneurs, and these ideas are part of our agenda for 2023. The SEC should follow suit, roll up its sleeves like our inspirational entrepreneurs, retail investors, and job-creators do every day and work together to expand opportunities for wealth creation and entrepreneurship.

French Hill represents the 2nd District of Arkansas and is a member of the Financial Services Investor Protection, Entrepreneurship and Capital Markets Subcommittee and Byron Donalds represents the 19th District of Florida and is a member of the Select Committee on Economic Disparity and Fairness in Growth.