On September 30, the Securities and Exchange Commission (the “Commission” or the “SEC”) published a number of notices aimed at modernizing the definition of “accredited investor,” including the possibility of a long-discussed accredited investor exam.
In their proposals, the Commission cited various potential benefits to issuers of expanding the pool of accredited investors, including “greater capital formation, lower cost of capital, and greater efficiency in raising capital due to an expanded pool of accredited investors (especially for issuers that are small or do not have access to a network of institutional accredited investors or persons with the required net worth or income to qualify as accredited investors).” For investors, the Commission notes that expanding the definition could enable more individuals to qualify as accredited, thereby allowing them to access a broader range of investment options, “potentially enhancing their ability to diversify and optimize portfolio allocations.”
Securities Act Rule 501(a)(10), adopted in 2020, provides that any natural person holding standing one or more professional certifications or designations or credentials from certain accredited educational institutions, in good standing, qualifies as an accredited investor. The Commission has the authority to designate which certifications or designations meet this threshold, based on a non-exclusive list in Rule 501(a)(10). Currently, this includes certain licenses granted by the Financial Industry Regulatory Authority (“FINRA”). As the proposals point out, the Commission has now had over five years of experience working with Rule 501(a)(10), and “there is no evidence that we are aware of to suggest that the expansion in 2020 of the accredited investor definition to include these types of financially sophisticated investors has created investor protection concerns.” Therefore, each of the proposed changes would rely on the Commission’s authority under the rule to expand the group of accredited investors.
| Potential Designation | Description |
| Accredited Investor Exam Administered by FINRA | FINRA is developing an accredited investor exam specifically to satisfy the requirements of Rule 501(a)(10) and to assess a candidate’s comprehension and sophistication of securities and investing, including if the candidate has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment. Specific topics tested would include definitions and structures of securities, investment risks, disclosures and regulatory requirements, financial statements, conflicts of interest and corporate governance. |
| FINRA Investment Banking Representative License (Series 79) and Research Analyst License (Series 86 and Series 87), held in good standing | Holding a Series 79, 86 and/or 87 license requires passing an exam demonstrating “knowledge and skill” in the functions of an investment banking representative or research analyst, as applicable. Candidates for such licenses must be sponsored by a FINRA member or other applicable self-regulatory organization member firm. |
| U.S. Certified Public Accountant (“CPA”) License, held in good standing | Criteria for obtaining a license includes (i) meeting certain educational and experience requirements, which vary by jurisdiction, but generally include supervised employment experience, and (ii) passing the Uniform CPA Examination, which tests accounting skills and knowledge. |
| Chartered Financial Analyst (“CFA”) Designation, held in good standing | Holders of CFA charters must (i) meet eligibility requirements related to education and work experience, (ii) enroll in the CFA Program, (iii) pass all three levels of the CFA exam, which tests “CFA candidates’ knowledge and skills related to investment analysis, valuation, portfolio construction, and ethical decision-making,” and (iv) join the CFA Institute and annually reaffirm adherence to the CFA Institute Code of Ethics and Standards of Professional Conduct. |
| Certified Financial Planner (“CFP”) Certification, held in good standing | CFPs must (i) satisfy educational and experience requirements and (ii) pass the CFP exam, which tests candidates’ “knowledge and skills in the areas identified by the CFP Board as relevant to the CFP certification,” such as financial planning and risk management. |
SEC Chairman Paul S. Atkins noted his agreement with the sentiment underlying the proposed changes, namely that “accredited investor access to private offerings should not be limited solely to individuals satisfying financial thresholds and that such thresholds are not the sole indicators of a person’s ability to assess the merits and risks of an investment.” Commissioner Hester Peirce, while overall in favor of the changes, questioned the Commission’s continuing role as “judge” in “evaluating the merits of particular credentials, degrees, or certifications,” and noted that an exam “still embodies a government-as-gatekeeper mentality.”
Find more information about the proposed designations here. Read Chairman Atkins’ statement here and Commissioner Peirce’s statement here. Comments can be submitted based on the instructions in each notice, and are due 60 days after the date of publication in the Federal Register.