Accredited Investor: Let’s Let People Test In

The idea that you can “test in” to accredited investor status is gaining momentum.

Rep. Schweikert (R-Ariz.) has introduced a bill that would do just that. His bill has passed out of the House Financial Services Committee and is apparently headed to the floor of the House.

You can track the progress of the bill here.

The full text of the bill is quoted below:

SECTION 1. SHORT TITLE.

This Act may be cited as the “Fair Investment Opportunities for Professional Experts Act”.

SEC. 2. ACCREDITED INVESTOR DEFINITION.

Not later than 180 days after the date of enactment of this Act, the Securities and Exchange Commission shall revise its rules under Regulation D (17 C.F.R. 230.501 et seq.) to provide that a natural person shall be considered an accredited investor under such regulation notwithstanding the income and net worth requirements in paragraphs (5) and (6) of section 230.501(a) of title 17, Code of Federal Regulations, if such person certifies to the issuer prior to the sale of securities to such person that he or she—

(1) is a person described in paragraphs (1), (2), (3), or (4) of section 506(c)(2)(ii)(C) of such title;

(2) has retained and used the services of any person referred to in paragraph (1) to make an investment decision relative to the securities being offered; or

(3) is licensed as an accredited investor by the Financial Industry Regulatory Authority after completing an exam administered by such Authority using the criteria established by the Securities and Exchange Commission under section 2.

SEC. 3. FINRA LICENSING PROGRAM.

Not later than 180 days after the date of enactment of this Act, the Securities and Exchange Commission shall establish criteria for use by the Financial Industry Regulatory Authority in administering an exam to license as accredited investors natural persons who don’t meet the income and net worth requirements in paragraphs (5) and (6) of section 230.501(a) of title 17, Code of Federal Regulations. Such criteria may include methods for assuring that licensed accredited investors demonstrate a competency in understanding the following:

(1) The different types of securities.

(2) The disclosure obligations under the securities laws of issuers versus private companies.

(3) The structures of corporate governance.

(4) The components of a financial statement.

(5) Other criteria the Commission shall establish in the public interest and for the protection of investors.

You might be wondering: Who are the folks specified in paragraphs (1), (2), (3), or (4) of section 506(c)(2)(ii)(C). This is the group:

  1. A registered broker-dealer;
  2. An investment adviser registered with the Securities and Exchange Commission;
  3. A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law; or
  4. A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office.

I am a fan of this idea. The SEC staff also suggested a way to test into accredited investor status in its recent report on the accredited investor definition.

I can hear the other side. The arguments will be–these folks might have the financial sophistication, but be unable to bear the economic loss. Therefore, they shouldn’t be allowed to test in. I don’t agree. If anything, the response to this is–ok, then limit the amount such persons can invest in any one company.

This will be a fun thing to watch develop. I hope it moves forward. I would like to take the test myself, just to see how I would do.

In its report, the SEC had some ideas on how the test could be assembled from parts of other exams.

Portions of FINRA’s Series 7 and Series 82 examinations cover these areas and could potentially be used as a model for developing an accredited investor examination. Among other subjects, the Series 7 examination covers securities regulatory requirements, securities characteristics and financial analysis. Knowledge of the regulatory landscape is particularly important because individuals who invest in unregistered offerings should understand that they will generally not receive the type of information contained in a registration statement. The Series 7 examination consists of 250 multiple choice questions that candidates have six hours to complete. Among other subjects, the Series 82 examination similarly includes questions related to the regulation of the markets for registered and unregistered securities, securities characteristics and financial analysis. The scope of the Series 82 examination is more limited than the Series 7 examination because it focuses on private transactions. It contains 100 multiple choice questions that candidates have two-and-a-half hours to complete….

It will be fun to watch the legal/regulatory developments here.

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