Sophistication or Discrimination? How the Accredited Investor Definition Unfairly Limits Investment Access for the Non-Wealthy and the Need for Reform (U.S. House Committee on Financial Services, Subcommittee on Capital Markets)

Hearing	Sophistication or Discrimination? How the Accredited Investor Definition Unfairly Limits Investment Access for the Non-Wealthy and the Need for Reform
Committee	U.S. House Committee on Financial Services, Subcommittee on Capital Markets
Date	February 8, 2023

 

Hearing Takeaways:

• The Private Offerings Market and the Role of U.S. Securities and Exchange Commission’s (SEC) Accredited Investor Definition: The hearing focused on the ability of retail investors to participate in private market offerings and whether this ability should be expanded. The SEC currently requires that people meet their accredited investor definition to participate in these offerings. An accredited investor is defined as a natural person with a net worth that exceeds $1 million (not including their primary residence) or an annual income of at least $200,000 (or $300,000 with a spouse). An estimated 13 percent of U.S. households currently qualify as accredited investors under the current definition. Subcommittee Chairman Ann Wagner (R-MO) and Ms. Schulp noted how there are significantly more private market offerings than public market offerings and asserted that this dynamic underscores the importance of expanding investor access to said offerings.
  • Access to Capital Issues for Entrepreneurs from Underrepresented Groups and Communities: Subcommittee Members, Ms. Bell, Mr. Olivencia, and Mr. Velasquez expressed particular concerns over how entrepreneurs from minority communities and non-Coastal regions receive less private investment than White and Coastal-residing entrepreneurs.
• Support for Expanding the SEC’s Accredited Investor Definition: Subcommittee Republicans, Ms. Bell, Mr. Olivencia, Ms. Schulp, and Mr. Velasquez expressed support for expanding the SEC’s accredited investor definition beyond its current income and wealth thresholds. They contended that such an expansion would increase retail investor access to private market offerings, which could facilitate opportunities for social mobility. They suggested that this expansion could be accomplished through either reducing income and wealth thresholds or providing alternative means for becoming an accredited investor (such as through accreditation or examination).
  • Concerns regarding the Current Definition’s Exclusive Reliance on Wealth and Income Factors: Subcommittee Republicans, Subcommittee Ranking Member Brad Sherman (D-CA), Ms. Bell, Mr. Olivencia, Ms. Schulp, and Mr. Velasquez all criticized the SEC’s current accredited investor definition for its exclusive reliance upon income and wealth. They asserted that wealth and income are not always good indicators for an investor’s sophistication level and noted how a lottery winner or a person that inherits wealth could qualify as accredited investors under the current definition. They also called the current wealth and income thresholds arbitrary and highlighted how these thresholds had not been updated since the early 1980s. Both Mr. Olivencia and Mr. Velasquez noted that it had taken them a long time to become deemed accredited investors, despite graduate degrees and extensive business experience. Ms. Bell indicated that she has not yet qualified as an accredited investor, despite her extensive experience working with startup companies.
  • Concerns regarding the Current Definition’s Impact on Underrepresented Populations: Subcommittee Republicans, Ms. Bell, Mr. Olivencia, and Mr. Velasquez stated that the SEC’s current income and wealth thresholds for becoming an accredited investor have disproportionally harmed minority communities. Mr. Velasquez testified that minorities only comprise 5 percent of the Angel Capital Association’s members. He raised concerns that increasing the SEC’s accredited investor definition’s income and wealth thresholds would further reduce this percentage.
  • Concerns regarding the Current Definition’s Impact on Underrepresented Geographies: Subcommittee Republicans, Ms. Schulp, and Mr. Velazquez noted how most private market investors tend to live in the U.S.’s Coastal regions. They raised concerns that the SEC’s current accredited investor definition is exacerbating wealth gaps between the U.S.’s Coastal and non-Costal regions through limiting the pool of eligible startup company investors in non-Costal regions. 
  • Proposals to Provide Credential, Education, and/or Examination Pathways to Become an Accredited Investor: Subcommittee Members and the hearings witnesses expressed interest in considering whether the U.S. should adopt credential, education, and/or examination pathways to become an accredited investor. Subcommittee Members, Ms. Bell, Mr. Olivencia, Ms. Schulp, Mr. Velasquez, and Prof. Fletcher expressed interest in considering the establishment of an examination that could enable anyone to become deemed an accredited investor upon passage. However, there was disagreement regarding the precise body that should administer this examination. Of note, Ms. Bell, Mr. Olivencia, and Mr. Velazquez suggested that their organizations could play a role in providing accreditation to investors. However, Prof. Fletcher argued that the creation of new pathways to become an accredited investor would not address the central problem underlying the private markets, which is the lack of clear and consistent information for investors.
  • Proposals to Permit Self-Certification for Obtaining Accredited Investor Status: Mr. Olivencia, Ms. Schulp, and Mr. Velasquez suggested that self-certification would be sufficient for enabling people to obtain accredited investor status. Prof. Fletcher warned however that self-certification would enable unsophisticated investors to pursue very risky private market offerings and to forgo their ability to obtain recourse.
• Support for Reforming the SEC’s Accredited Investor Definition: Subcommittee Ranking Member Brad Sherman (D-CA) expressed opposition to the SEC’s current accredited investor definition and contended that this definition should be reformed.
  • Adoption of a Limit on Private Market Investments: Subcommittee Ranking Member Sherman suggested that the Committee consider changing the definition of accredited investor to a person that is investing less than 5 percent of their net worth. Ms. Bell expressed receptiveness to imposing some restrictions on the ability of people to invest based on their incomes.
  • Requirements for Investment Advisors: Subcommittee Ranking Member Sherman also suggested that people that relied upon the advice of investment advisors should be permitted to invest in private market offerings. He asserted however that these advisors must be fiduciaries, truly independent, not receiving a commission, and not have an expectation of receiving referred business from an investment’s promotor.
• Reservations about Expanding or Reforming the SEC’s Accredited Investor Definition: Most Subcommittee Democrats and Prof. Fletcher expressed reservations regarding proposals to expand or reform the SEC’s current accredited investor definition. They cautioned that such proposals could leave retail investors vulnerable to poor investments and fraud and that these changes could amplify wealth inequalities.
  • Lack of Information within the Private Markets: Prof. Fletcher emphasized how U.S. private markets are not subject to the same level disclosure requirements as U.S. public markets. She also noted how private companies are not required to provide the same levels of disclosure to all of their investors. She commented that this dynamic could lead larger institutional investors to have information advantages over smaller retail investors. Ms. Bell and Mr. Velasquez argued however that private companies seeking investments tend to undergo rigorous due diligence processes and stated that the private investors assessing these companies tend to work and groups and to thoroughly vet the companies before making investment offers. Subcommittee Ranking Member Brad Sherman (D-CA) also noted how the audits and due diligence in the public markets cost a lot of money to perform. He commented that these audits and due diligence are often not economical for the private market investments.
  • Fraud Risks in the Private Markets: Subcommittee Democrats and Prof. Fletcher expressed concerns that private market investors face greater fraud risks and that retail investors might have little to no recourse in responding to frauds. They specifically asserted that FTX’s recent collapse, Theranos’s false promises surrounding a defective product, and the subprime mortgage crisis show how bad actors in the private markets can take advantage of investors. Prof. Fletcher further noted how the SEC’s current accredited investor definition’s use of wealth thresholds enable many senior citizens to qualify as accredited investors. She raised concerns over how these senior citizens are often taken advantage of in these private investment opportunities.
  • Lack of Liquidity in the Private Markets: Rep. Sean Casten (D-IL) and Prof. Fletcher discussed how private market investments are often illiquid in nature, which means that investors are generally unable to promptly withdraw their funds in the event that they need instant access to funds. They noted how many traditional public market assets (such as stocks, bonds, options, and mutual funds) by contrast are very liquid. They raised concerns that retail investors might therefore be ill-suited to absorb the risks and losses associated with private market investments.
  • Quality of Private Market Investment Opportunities for Retail Investors: Prof. Fletcher contended that retail investors would not have the best access to private market opportunities. She stated that private companies would first seek out institutional investors because this capital is cheaper and easier to administer. She cautioned that the private companies and funds that solicit capital from retail investors would disproportionately be those that could not access funding from institutional investors.
• Additional Proposed Policy Reforms: In addition to the SEC’s accredited investor definition, Subcommittee Chairman Ann Wagner (R-MO) and Ms. Schulp expressed interest in two other policy topics related to private market investment opportunities.
  • Expansion of the Ability of Closed-End Funds to Invest in Private Market Offerings: Subcommittee Chairman Wagner and Ms. Schulp called on Congress to expand access to private market investment opportunities for retail investors through closed-end funds. The SEC currently limits the private security investments of closed-end funds to 15 percent of the fund’s net assets. They contended that the U.S. should allow for closed-end funds to invest all of their assets in private securities. They stated that this policy change would provide retail investors with improved access to private markets in a regulated fashion.
  • Provision of Equity Compensation Opportunities for Gig Economy Workers: Subcommittee Chairman Wagner and Ms. Schulp also remarked that the U.S. should provide equity compensation opportunities for gig workers. They asserted that gig workers deserve the same opportunities for financial stability and growth as traditional employees.

Hearing Witnesses:

1. Mr. Eli Velasquez, Founder & Managing Partner, Investors of Color Network
2. Ms. Omi Bell, Founder, Black Girl Ventures
3. Mr. David Olivencia, CEO & Co-Founder, Angeles Investors
4. Ms. Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute
5. Prof. Gina-Gail Fletcher, Professor of Law, Duke University

Member Opening Statements:

Subcommittee Chairman Ann Wagner (R-MO):

• She discussed how companies currently have two options for accessing securities market capital: an initial public offering (IPO) or a private offering.
  • She noted how many smaller companies face challenges pursuing IPOs due to the “considerable” costs associated with public company reporting requirements.
• She commented that while private offerings can often be a more cost-efficient way for private companies to raise capital, she asserted that the use of private offerings to raise capital has several unique challenges.
  • She specifically highlighted how the accredited investor definition (which uses wealth and other limited criteria to determine an investor’s sophistication) restricts the pool of potential investors for private offerings.
• She remarked that the gap between private and public offerings is “substantial” and noted how the amount of capital raised from private offerings had reached $4.5 trillion between July 2021 and June 2022.
  • She indicated that only $126 billion had been raised through IPOs during this same period.
• She asserted that the U.S. must broaden the available pool of investors in private markets to increase access to investment opportunities for all Americans and to help entrepreneurs raise more funds.
  • She expressed agreement with SEC Commissioner Hester Peirce’s argument that economic status should not be used as an indicator for financial sophistication and that the accredited investor standard discriminates against lower income Americans.
• She called on Congress to reform the SEC’s “outdated” accredited investor definition and to expand the number of individuals that could qualify as accredited investors.
• She also stated that Congress must expand access to investment opportunities for retail investors through closed-end funds.
  • She explained that closed-end funds had their shares traded on the open market and possessed some similar traits with exchange-traded funds (ETFs) and mutual funds.
• She noted how approximately 3 million retail investors rely upon closed-end funds as sources for retirement savings and investment opportunities.
  • She indicated that the SEC currently limits the private security investments of closed-end funds to 15 percent of the fund’s net assets.
• She contended that the U.S. should allow for closed-end funds to invest all of their assets in private securities.
  • She commented that this policy change would enable retail investors to increase their investment exposure to private markets in a protected fashion.
• She further remarked that the U.S. should provide equity compensation for gig workers and noted how gig workers now comprise over 25 percent of the U.S. workforce.
  • She commented that gig workers deserve the same opportunities for financial stability and growth as traditional employees.
• She concluded that expanding investment opportunities for all investors and entrepreneurs is both a moral imperative and key to supporting U.S. economic growth and prosperity.

Subcommittee Ranking Member Brad Sherman (D-CA):

• He remarked that investor protections are meant to serve as barriers to investments given how investments can involve fraud or be ill-suited for certain groups of people.
  • He commented that the U.S. must balance the need for investor protection and securities regulation with the promotion of access to capital.
• He stated that securities regulation helps parties seeking to raise capital and noted how investors tend to seek out jurisdictions that maintain robust securities rules.
• He then expressed opposition to the U.S.’s current accredited investor definition and contended that this definition should be updated.
  • He commented that a lottery winner could qualify as an accredited investor under the current definition based on their assets, despite lacking any financial acumen.
  • He also noted how the definition’s $1 million threshold had been set in 1982 and has not been updated since its inception.
• He suggested that the Committee consider changing the definition of accredited investor to a person that is investing less than 5 percent of their net worth in a particular investment and either holds relevant licenses or relies upon a sophisticated advisor.
  • He asserted however that this advisor must be a fiduciary, truly independent, not receiving a commission, and not have an expectation of receiving referred business from an investment’s promotor.

Witness Opening Statements:

Ms. Omi Bell (Black Girl Ventures):

• She discussed how her organization, Black Girl Ventures, provides access to capital, capacity, and community for minority women founders.
  • She testified that her organization had funded 450 minority women-owned businesses to date across 15 cities.
• She remarked that systematic barriers to financial education prevent middle class, low-income, and minority individuals from achieving economic mobility and wealth.
• She recounted how entrepreneurship had enabled her to escape poverty and noted how she had relied upon her mother’s retirement savings to launch her first business.
• She stated however that systematic barriers to finance prevent most founders in the Black community from obtaining capital for their businesses from their friends and family.
  • She indicated that these founders face additional barriers in accessing investment opportunities to scale their businesses.
• She highlighted how Black women in the U.S. start businesses at six times the national average and receive less than one percent of venture capital funding.
• She discussed how Black Girl Ventures provides funding for minority women founders and testified that the organization has provided over $3 million in funding to early-stage businesses.
  • She mentioned that these businesses have gone on to hire employees and gain shelf space in the U.S.’s largest retailers.
• She remarked however that she is not deemed a sophisticated investor under the current definition of the term, despite her extensive business experience.
  • She commented that her inability to qualify as a sophisticated investor prevents her from investing in many early-stage businesses.
• She noted how the SEC had last updated its accredited investor definition in 2020 and commented that this attempt was meant to address diversity and equity concerns.
  • She asserted however that the addition of credential and certification requirements neglect “equally” relevant markers of financial sophistication.
• She asserted that reforms to the SEC’s accredited investor definition must protect investors and the public interest and increase access to investment opportunities for historically excluded communities.

Mr. David Olivencia (Angeles Investors):

• He discussed how his organization, Angeles Investors, works to find, fund, and grow the most promising Hispanic and LatinX ventures.
• He stated that while he had carefully studied early stage investing while pursuing his graduate business degree from a top university, he indicated that he had been prevented from making early-stage investments because he did not meet the income or net worth requirements to qualify as an accredited investor.
  • He noted however that he had subsequently been able to become an accredited investor and testified that his investment portfolio contains approximately 70 companies.
• He then discussed how the angel investing sector contained few Hispanic, Black, or female investors and noted how less than 2 percent of venture fund investments went to Hispanic founders.
  • He highlighted how Hispanics comprise between 20 percent and 30 percent of the U.S. population and how the Hispanic community contributes about $3 trillion to the U.S.’s gross domestic product (GDP).
  • He further indicated that women and Black startup founders receive about 2 percent of all venture capital funding.
• He mentioned how he had established Angeles Investors in 2020 to provide training and education to enable its members and investors so that they could better evaluate startup companies.
• He stated that many non-accredited investors in the Hispanic community are limited in their ability to invest in community businesses due to the SEC’s accredited investor definition.
• He expressed his interest in working to improve the SEC’s accredited investor definition and increase investment access for a wider range of potential investors.

Ms. Jennifer Schulp (Cato Institute):

• She discussed how private securities offerings are diverse and include direct investment in individual companies, as well as pooled investments into private equity funds, hedge funds, and other types of funds.
  • She explained that these offerings are often made pursuant to exemptions provided under SEC Rule 506 of Regulation D.
• She highlighted how almost twice as much money had been raised under Rule 506(b) than by all registered offerings between July 1, 2021 and June 30, 2022.
  • She added that offerings made under Rule 506(c) had raised more money than was raised in IPOs.
• She noted how a person’s eligibility to invest in an SEC Rule 506 offering is largely determined by whether the person meets the definition of an accredited investor.
  • She indicated that an accredited investor is defined as a natural person with a net worth that exceeds $1 million (not including their primary residence) or an annual income of at least $200,000 (or $300,000 with a spouse).
• She noted that the SEC estimates that about 13 percent of U.S. households qualify as accredited investors.
  • She commented that this dynamic raised concerns over the wisdom of the SEC’s current accredited investor definition.
• She asserted that the current accredited investor definition is objectionable because it gives the SEC the authority to limit how people can invest their own money.
• She also criticized the SEC’s accredited investor definition for conflating wealth with sophistication.
  • She noted how elderly people with substantial retirement savings and lottery winners with windfall profits could be considered accredited investors under the SEC’s current definition of the term.
• She also stated that the SEC’s accredited investor definition excludes people that lack substantial savings, but possess general investment knowledge or have experience in the industry in which they seek to invest.
• She further remarked that a generic wealth test is suboptimal if the goal is to limit access to private investments to only those that could afford to withstand investment losses.
  • She asserted that loss tolerance is not solely based on wealth and commented how younger investors might be more equipped to survive investment losses given that they have longer investment time horizons.
• She stated that no simple blanket rule could capture individual investor sophistication and that this regulatory regime limits the ability of middle- and lower-income Americans to amass wealth, diversify holdings, and hedge certain risks.
• She discussed how there are fewer public companies today than there had existed 20 years ago and noted how companies now tend to be more mature when they go public.
  • She commented that this dynamic means that companies are often past their high growth phase by the time that most people can invest in them.
• She remarked that the current accredited investor definition is reinforcing wealth gaps that exist in American society through reserving private market investment opportunities for the already wealthy.
  • She noted how the people that qualify as accredited investors are disproportionately White and are concentrated on the East and West Coasts.
• She also stated that the SEC’s current accredited investor definition harms entrepreneurs in their efforts to raise capital for their ventures.
• She recommended that the SEC’s accredited investor definition be reformed at a minimum to allow for more investors to participate in private offerings.

Mr. Eli Velasquez (Investors of Color Network):

• He indicated that he was testifying on behalf of the Angel Capital Association, which is the professional society for U.S. angel investors.
• He remarked that accredited angel investors are the “wellspring” of early-stage capital in many small and mid-sized communities.
  • He commented that angel investors are focused on promoting diversity, equity, and inclusion as part of their investor and entrepreneur education efforts.
• He recounted his early career experience running technology incubators and noted how he had been prohibited from pursuing his own investments in startup ventures because of the accredited investor definition.
  • He highlighted how he had worked with a younger investor that had satisfied the accredited investor definition through their family trust.
  • He indicated that he had finally qualified as an accredited investor after 22 years as a rocket scientist, intellectual property (IP) expert, non-profit organization founder, university executive, and angel group founder.
• He discussed how communities in the Middle East, Latin America, and Southeast Asia have developed inclusive approaches to train and engage as many investors as possible in angel investing.
  • He commented that these efforts had inspired him to establish his organization, Investors of Color, which is a national network of diverse accredited investors that seeks to build wealth for and by underrepresented communities.
• He remarked that the U.S. needs to reduce the barriers to entry for becoming an accredited investor and provided several policy recommendations for accomplishing this.
  • He first recommended that Congress amend the definition of accredited investor to include certain licenses or qualifying education or experience.
  • He then recommended that Congress direct the SEC to establish an examination for accredited investors.
  • He also recommended that Congress require additional certifications for becoming an accredited investor (including reassessments every five years).
  • He further recommended that the Congress require the SEC to permit self-certification for becoming an accredited investor.
  • He finally recommended that Congress implement investment safeguards.
• He also urged Congress to not increase the current minimum income thresholds for investor accreditation.
  • He stated that Congress should require accredited investors to join professional organizations (such as Angel Capital Association or the National Venture Capital Association).

Prof. Gina-Gail Fletcher (Duke University):

• She remarked that the expansion of the private markets would put investors and the U.S. economy at risk.
  • She asserted that no amount of wealth or sophistication are a sufficient substitute for robust securities laws that ensure that all investors get the information needed to make informed investment decisions.
• She noted that there are arguments that the limitation of private offerings to accredited investors is discriminatory and that private market securities should be sold to retail investors.
  • She asserted that these arguments have “perverse logic at best.”
• She remarked that the public markets generally treat all investors fairly and equally, regardless of wealth, sophistication, or connections.
  • She asserted that private markets by contrast do not generally treat investors fairly and equally.
• She stated that expanding the SEC’s accredited investor definition would not result in more wealthy people and would instead expand opportunities for wealth extraction and amplify wealth inequalities.
• She discussed how federal securities laws are premised on the idea that companies seeking to raise money from the public must provide all investors with basic financial governance and operational information.
  • She contended that these disclosure requirements sought to protect and promote capitalism (rather than just protect smaller investors).
• She criticized the SEC for permitting companies to offer and sell securities without registering with the Agency if the investors are sufficiently wealthy.
  • She noted that the presumption behind this policy is that wealthy investors do not need the protections of federal securities laws because of their wealth and sophistication.
  • She asserted that this presumption has been proven to be misguided.
• She stated that private companies and investment funds would not provide retail investors with comprehensive, reliable, and comparable information needed to make informed investment decisions.
• She asserted that no amount of education would address the lack of information that is innate in the private markets.
• She highlighted how retail investors generally could not easily adjust if they could not retrieve their funds from investments in private companies.
  • She explained how retail investors that are invested in traditional assets (such as stocks, bonds, options, and mutual funds) could sell their holdings instantly while retail investors that are invested in the private markets could not sell their holdings instantly.
• She also discussed how the valuations of public market investments are publicly available and instantly knowable while the valuations of private market investments are opaque and based on the assertions of insiders.
• She contended that retail investors would not have equitable access to private market opportunities and stated that private companies would first seek out institutional investors because this capital is cheaper and easier to administer.
  • She commented that the private companies and funds that solicit capital from retail investors would disproportionately be those that could not access funding from institutional investors.
• She further warned that private market investors face greater fraud risks and that retail investors might have little to no recourse in responding to frauds.
• She urged Congress to not expand investor access to the private markets and to condition all exemptions of U.S. securities laws upon the timely and equitable disclosure of essential information.

Congressional Question Period:

Subcommittee Chairman Ann Wagner (R-MO):

• Chairman Wagner stated that SEC Chairman Gary Gensler’s regulatory agenda includes “sweeping” new rules that would create barriers for investors and entrepreneurs to participate in the private markets. She noted how the SEC’s rulemaking agenda indicates that Chairman Gensler intends to amend the SEC’s accredited investor definition through increasing the definition’s annual income and net worth thresholds. She asserted that changes that would shrink the pool of accredited investors would harm capital formation efforts. She asked Mr. Velasquez to discuss how raising the accredited investor definition’s financial thresholds would impact investors and businesses seeking to raise capital in private markets.
  • Mr. Velasquez noted how the SEC had drafted the accredited investor definition’s financial thresholds during the early 1980s and called these thresholds arbitrary. He testified that the Angel Capital Association’s analysis has found that increasing the SEC’s accredited investor definition’s financial thresholds would cause the organization to lose between 60 percent and 70 percent of its members. He stated that this loss of accredited investors would particularly harm smaller cities. He then acknowledged that the membership of the Angel Capital Association is predominantly male and White and noted how minorities only comprise 5 percent of the organization’s members. He asserted that increasing the SEC’s accredited investor definition’s financial thresholds would “decimate” the U.S.’s minority investor class.
• Chairman Wagner then discussed how closed-end funds are strictly regulated and professionally managed investment vehicles that can invest in private markets. She highlighted how closed-end funds are accessible to retail investors. She stated however that the SEC’s limitations on the investments of closed-end funds in private markets are so stringent that they effectively deny retail investors access to private markets. She asked Ms. Schulp to discuss some of the current investor protection mechanisms in place for closed-end funds. She asked Ms. Schulp to indicate whether permitting closed-end funds to invest more than 15 percent of their assets into private securities would increase retail investor exposure to private markets while maintaining private investor protections.
  • Ms. Schulp discussed how closed-end funds are regulated under the Investment Company Act of 1940 and are run by registered investment advisers. She noted how registered investment advisors are subject to numerous regulations around their public access to the markets and their managerial responsibilities. She commented that these regulations should be sufficient. She expressed support for increasing the access that closed-end funds have to private equity opportunities and commented that closed-end funds have more investor protections than exist in private equity and other types of funds. She asserted that retail investors should have more opportunities to access private market investment opportunities. She stated that expanding the ability of closed-end funds to invest in private markets would support this increased access.
• Chairman Wagner then noted how gig workers compose over a quarter of the U.S. workforce. She asked Ms. Schulp to indicate whether these workers should have access to equity compensation so that they can participate in the growth of the companies that they had helped to make successful.
  • Ms. Schulp answered affirmatively. She asserted that gig workers should have access to the same opportunities as regular salaried employees.

Rep. Juan Vargas (D-CA):

• Rep. Vargas expressed general agreement with Prof. Fletcher’s concerns over efforts to expand the SEC’s accredited investor definition. He asked Prof. Fletcher to compare the protections that exist in the public markets with the protections that exist in the private markets. He also noted how other countries maintain their own accredited investor definitions.
  • Prof. Fletcher stated that one of the starkest distinctions between the public and private markets involves access to information. She noted how public market offerings must provide basic audited financial statements and period disclosures. She noted how private market offerings by contrast do not have the same investor disclosure requirements so long as the offerings are only made to accredited investors. She stated that this absence of disclosures for private market offerings make it impossible to value the investments fairly and accurately, which would result in a lack of liquidity. She commented that while institutional investors might be able to handle this lack of liquidity, she stated that retail investors are more likely to need to promptly withdraw their funds in response to an emergency. She warned that investments in private market offerings could not always be promptly withdrawn.
• Rep. Vargas noted how investments are subject to fraud statutes. She asked Prof. Fletcher to indicate whether the ability of investors to sue companies for fraud provides some level of protection.
  • Prof. Fletcher remarked that the fraud protections in the private markets are “significantly” weaker than the fraud protections in the public markets. She attributed the weakness of these fraud protections in the private markets to a lack of information. She also stated that fraud liability in the private markets differs significantly from fraud liability in the public markets.
• Rep. Vargas provided the other witnesses with an opportunity to comment on the investor protections in the private markets.
  • Mr. Velasquez stated that angel investing activity had become more professionalized over the previous 40 years. He largely attributed this trend to organizations like the Angel Capital Association. He asserted that the evaluation process for private market opportunities is very rigorous and stated that angel investors work in groups to thoroughly vet investment opportunities. He remarked that angel investors had an incentive to perform rigorous evaluations because such evaluations are key to maintaining their reputations. He testified that the Angel Capital Association had assessed thousands of deals and asserted that fraud is not common in private market offerings. He stated that angel investing is a high-risk asset class and commented that prospective investors in the asset class should be cognizant of these risks.

Rep. Bill Huizenga (R-MI):

• Rep. Huizenga thanked the hearing’s witnesses for articulating the problems with the SEC’s accredited investor definition. He stated that Prof. Fletcher’s testimony suggests a total opposition to all private market investing activity. He asserted that Mr. Olivencia, Ms. Bell, and Mr. Velasquez are all very sophisticated investors. He highlighted how U.S. investors are primarily concentrated on the East and West Coasts and noted how these coastal areas tend to be more expensive than the interior regions of the U.S. He asserted that increasing the economic thresholds for the accredited investor definition would thus disproportionately harm non-coastal areas of the U.S. He mentioned how he had introduced the Accredited Investor Definition Review Act during the previous 117th Congress. He explained that this legislation (among other things) would require the SEC to review a list of qualifications, designations, and credentials for individuals to qualify as accredited investors. He then asked Ms. Bell to respond to concerns that reducing the economic thresholds for becoming an accredited investor would exacerbate wealth inequality.
  • Ms. Bell remarked that reducing the economic thresholds for becoming an accredited investor would provide more wealth creation opportunities. She recounted how she worked with a minority female data scientist entrepreneur that had graduated from the Massachusetts Institute of Technology (MIT). She noted how this entrepreneur had made 300 pitches before she could obtain an investment offer. She indicated that this entrepreneur had ultimately decided to raise funds from her church community. She stated that overly stringent restrictions on becoming an accredited investor would lead to a less diverse pool of investors. She asserted that a more diverse pool of investors would be critical for improving access to capital for minority entrepreneurs. She elaborated that minority investors tend to better understand the needs of minority entrepreneurs and the communities that they are trying to serve.
• Note: Rep. Huizenga’s question period time expired here.

Subcommittee Ranking Member Brad Sherman (D-CA):

• Ranking Member Sherman expressed agreement with Prof. Fletcher’s assertion that the liquidity and audited financial statements of publicly registered companies provide the best level of investor protection. He remarked however that these audited financial statements and liquidity cost millions of dollars to provide. He added that the investment analyst industry spends millions of dollars to assess the veracity of public company claims. He also stated that the private markets are much larger than commonly perceived and noted how many traditional small businesses (such as neighborhood pizzerias and small apartment buildings) involve funding from multiple parties. He commented that these traditional small businesses are illiquid and lack audited financial statements. He then stated that if the SEC’s accredited investor definition is to focus on wealth, he asserted that this definition should then be indexed to inflation. He remarked however that this focus on wealth is unfair and illogical. He stated that the SEC’s accredited investor definition should seek to determine the sophistication of either the investor or the investment advisor. He commented that it is unfair to determine whether an investor is sophisticated based on their possession of a graduate business degree. He asked Mr. Olivencia to identify the standards that should be used for determining what constitutes a sophisticated investor.
  • Mr. Olivencia expressed support for allowing people to use their licenses and educational degrees to obtain accredited investor status. He also stated that examinations could serve as a path for obtaining accredited investor status and commented that the Angel Investing Association could administer these examinations. He further suggested that self-certifications could enable people to become accredited investors.
• Ranking Member Sherman interjected to ask Mr. Olivencia to indicate whether the U.S. should maintain different standards for determining the sophistication of investors and the sophistication of investment advisors.
  • Mr. Olivencia stated that there would likely need to exist numerous safeguards surrounding the sophistication requirements for investment advisors.
• Ranking Member Sherman interjected to comment that investment advisors would need to be independent of all of their client’s investments and asserted that a fiduciary standard alone would be insufficient. He specifically stated that investment advisors could not receive commissions or referrals from the investment’s promoter.
  • Mr. Olivencia commented that policymakers would need to consider ways to police investment advisors.
• Ranking Member Sherman noted how violators of Regulation D are liable for investor losses and subject to criminal penalties. He lastly asked the witnesses to indicate whether an outside investor should be permitted to invest more than 10 percent of their net worth into a private offering, to which one witness responded affirmatively. (Note: The identity of the witness that answered affirmatively to the question was not indicated in the hearing’s video).

Rep. Pete Sessions (R-TX):

• Rep. Sessions expressed agreement with Rep. Bill Huizenga’s comments in support of expanding the SEC’s accredited investor definition. He asked Ms. Schulp to provide recommendations for reforming the SEC’s accredited investor definition.
  • Ms. Schulp remarked that expanding opportunities for investors would benefit both investors and entrepreneurs. She also stated that expanding the SEC’s accredited investor definition would facilitate knowledge sharing between serial entrepreneurs that do not meet the wealth standard under the current accredited investor definition and new entrepreneurs. She then remarked that the ideal solution for reforming the accredited investor definition would be consideration of self-certification coupled with short form disclosures to investors about the risks associated with private market offers. She noted that private market offers had unique risks and contended that investors should have the option to assume these risks. She also suggested that policymakers consider allowing people to qualify as accredited investors through educational attainments or tests. She raised concerns however over the SEC’s ability to design an appropriate test that would enable people to qualify as accredited investors. She specifically expressed concerns that the SEC would erect barriers that would render it impossible for people to prove their sophistication.
• Rep. Sessions reiterated his support for making it easier for people to pursue private market opportunities.

Rep. Sean Casten (D-IL):

• Rep. Casten asked Ms. Schulp to indicate whether she would support applying the same accounting and public disclosure obligations to both public and private companies.
  • Ms. Schulp responded no.
• Rep. Casten recounted how he had recently met with a large institutional fund that had lost money investing in FTX. He indicated that this large institutional fund had told him that it had not conducted its own due diligence on FTX and had instead assumed that much larger institutional investors had already vetted the company. He emphasized that this large institutional fund that had invested in FTX is considered a sophisticated investor. He asked Prof. Fletcher to indicate whether reduced standards for sophisticated investors would have imposed more or less accountability on FTX’s leadership.
  • Prof. Fletcher remarked that reducing the standards for sophisticated investors would have imposed less accountability on FTX’s leadership. She disputed the previous assertion that she wants to ban private markets and stated that she merely wants to increase the amount of available information within the private markets. She asserted that private markets currently lack all information and commented that private companies have too much discretion regarding if and when they will make disclosures. She stated that FTX’s recent collapse had demonstrated that even sophisticated investors could be tricked into making poor investments. She expressed concerns that expanding the SEC’s accredited investor definition would result in more retail investors making poor investment decisions.
• Rep. Casten also discussed how venture capital investors generally expect to lose money on most of their investments and receive outsized returns on a small number of their investments to derive a profit. He stated that this dynamic meant that private market investors must be able to absorb losses. He raised concerns that the absence of an accredited investor definition for private market investing could therefore cause many people to lose all of their money. He then asked Prof. Fletcher to indicate whether Ponzi scheme perpetrators would be likely to support the proposals to expand the SEC’s accredited investor definition.
  • Prof. Fletcher answered affirmatively. She stated that self-certification would enable unsophisticated investors to pursue very risky private market offerings and to forgo their ability to obtain recourse.
• Rep. Casten asked Prof. Fletcher to project the impacts of allowing bad actors in the private markets to access retail investor funding.
  • Prof. Fletcher stated that allowing bad actors in the private markets to access retail investor funding would enable bad actors to exploit retail investors.

Rep. French Hill (R-AR):

• Rep. Hill discussed how the SEC’s accredited investor definition seeks to limit certain investment opportunities to only sophisticated investors that fully understand the risks of the given investment. He noted how this definition had not been updated in 40 years and called this definition “outdated.” He remarked that the SEC’s accredited investor definition uses outdated regulations that employ arbitrary thresholds, including income and net worth, to preclude people from promising investment opportunities. He asserted that the SEC’s accredited investor definition harms many Americans, especially knowledgeable Americans with modest incomes and net worths. He commented that denying economic opportunities for these Americans would perpetuate their social mobility issues. He called on federal policymakers to reevaluate the SEC’s accredited investor definition so as to provide both protections and opportunities to investors. He noted how the SEC could unilaterally amend its accredited investor definition and expressed frustration with the SEC’s failure to update the definition. He criticized SEC Chairman Gary Gensler for being overly focused on environmental matters and for not being focused enough on capital formation and investor protection matters. He mentioned how he had introduced the Fair Investment Opportunities for Professional Experts Act, which would expand the SEC’s accredited investor definition to include people with securities licenses and securities experience, as well as people with qualifying education and job experience. He recounted his experience working as a banker and mentioned how he had seen technology innovators that had been restricted in their ability to invest in their own companies. He called this situation unfair. He asked Ms. Bell to indicate whether expanding the SEC’s accredited investor definition could bring more people into the startup ecosystem and expand opportunities for creating wealth.
  • Ms. Bell answered affirmatively. She remarked that policymakers should focus on reducing the risks (rather than reducing the regulations) associated with private market offerings and commented that these efforts could involve the provision of investor information and education. She also highlighted how private market investments involve a due diligence process.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel expressed interest in ensuring that people of color, women, and veterans have access to capital and expressed support for the Subcommittee’s efforts to enhance capital formation opportunities. He stated however that the Subcommittee must also ensure that there exist proper consumer and investor protections. He then discussed how one proposal under consider for expanding the SEC’s accredited investor definition would be to allow people to become accredited investors through passage of an SEC-established and administered examination. He asserted that this examination must ensure that investors can recognize conflicts of interest at broker-dealers and investment advisors who market investment products. He also asserted that this examination must ensure that investors could comprehend and make use of financial statements to make investment decisions. He asked Prof. Fletcher to provide recommendations for ensuring that such an examination would be as robust as possible.
  • Prof. Fletcher expressed agreement with Rep. Nickel’s assertions that an SEC-established and administered examination that would enable people to qualify as accredited investors should require people to demonstrate their abilities to comprehend risks and make use of certain financial statements. She also suggested that the U.S. require some form of continuing education and recertification after a set number of years for people to maintain their accredited investor statuses. She stated however that such an examination would not address the underlying problem involving the absence of available information within the private markets.
• Rep. Nickel expressed interest in working to address this issue in a bipartisan manner.

Rep. Dan Meuser (R-PA):

• Rep. Meuser asked the witnesses to identify the most important reforms that Congress should make to the SEC’s current accredited investor definition.
  • Ms. Bell stated that Congress should enable people to use their work experience to qualify as accredited investors. She testified that she personally could not qualify as an accredited investor due to her failure to meet the current definition’s income thresholds, despite her work experience.
• Rep. Meuser asked Ms. Bell to indicate whether accredited investors should be restricted in terms of the percentage of income that they could invest into a given offering. He also asked Ms. Bell to indicate whether accredited investors should be permitted to borrow funds to make their investments.
  • Ms. Bell noted how investments involve inherent risks and expressed receptiveness to imposing some restrictions on the ability of people to invest based on their incomes.
• Rep. Meuser then asked Mr. Olivencia to indicate whether his investment fund’s investors receive some form of accountant-reviewed financial statement.
  • Mr. Olivencia answered affirmatively and highlighted how accredited investors have special rights to information. He then mentioned how he had been an executive at a Fortune 100 company, which had enabled him to “barely” qualify as an accredited investor. He stated that modestly reducing the income threshold for accredited investors would enable more people to qualify as accredited investors. He commented that these newly eligible people would possess the requisite education and certifications to be competent private market investors.
• Rep. Meuser asked Mr. Olivencia, Ms. Bell, and Mr. Velasquez to indicate typical losses and bad debts of their investment funds.
  • Mr. Olivencia testified that his investment fund had invested in about 70 companies. He noted that two of his fund’s portfolio companies had valuations over $1 billion and about ten of his fund’s portfolio companies had valuations of over $100 million. He also stated that his investment fund had lost their full investments in about 7 or 8 companies.
  • Ms. Bell clarified that her organization is a non-profit organization. She stated that her organization issues grants to companies and does not receive equity stakes in the companies.
  • Mr. Velasquez testified that he had only become an accredited investor two years ago, which meant that it remains too early to assess his investment fund’s performance.
• Rep. Meuser then asked Ms. Schulp to provide additional recommendations for expanding eligibility to become an accredited investor (beyond reducing income thresholds).
  • Ms. Schulp remarked that people should be able to become accredited investors without needing to meet specific income and wealth thresholds. She also stated that relying exclusively upon education credentials to determine accredited investor eligibility would be problematic because such eligibility would exclude entrepreneurs that have acquired skills through building their own businesses. She remarked that an examination would address some of these problems. She asserted however that the examination should not be overly difficult.
• Rep. Meuser interjected to indicate that his question period time had expired. He asked the witnesses to indicate how they found investors for their investment funds. He requested that the witnesses submit their responses to this question for the hearing’s record.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters noted how Prof. Fletcher had asserted that expanding securities law exemptions for accredited investors would weaken protections for retail investors. She stated that the SEC’s current accredited investor definition is too focused on income and wealth as an indicator of financial sophistication. She raised concerns however that expanding access to the “high risk” securities market to retail investors would make these retail investors vulnerable to unscrupulous financial intermediaries. She added that these financial intermediaries might have conflicts of interest and recommend terrible products to retail investors. She asked Prof. Fletcher to elaborate on the risks associated with the marketing of unregulated and unregistered securities to retail investors.
  • Prof. Fletcher highlighted how the private markets have no disclosure requirements. She acknowledged that while the other witnesses had indicated that they are able to obtain information relating to private market offerings, she noted that these witnesses are operating as groups that pool together the resources of multiple investors. She expressed doubts that individual retail investors would be easily able to access information from private funds or private companies. She stated that this lack of information would have additional consequences for retail investors, including a lack of liquidity and a reduced ability to evaluate private companies. She mentioned how liquidity issues had plagued Blackstone Real Estate Income Trust (BREIT) and noted how this company had prevented investors from redeeming their shares. She also stated that valuation issues in the private markets had contributed to FTX’s problems. She warned that retail investors would be especially vulnerable to these liquidity and valuation problems.
• Ranking Member Waters asked Prof. Fletcher to provide specific examples where institutional investors are still victims of fraud and abuse, despite their “supposed” sophistication. She commented that FTX’s recent collapse and the subprime mortgage crisis are two such examples. She stated that she had not previously realized the extent to which private market investors lack information and expressed support for increasing information disclosure requirements.
  • Prof. Fletcher mentioned how Theranos had been a private market company that had defrauded its investors. She then discussed how private market offerings could discriminate within their investor pools regarding which information will be offered, to whom will be offered the information, and when will the information be offered. He asserted that this inconsistent information disclosure among private market offerings poses significant problems for retail investors if these investors are permitted to enter the private market offering space. She stated that the U.S. could impose some of the disclosure requirements currently present in the public market offering space onto the private market offering space.

Rep. Zach Nunn (R-IA):

• Rep. Nunn discussed how the U.S. venture capital and early stage investing sector has often narrowly focused on certain regions of the U.S. He highlighted how most of the U.S.’s venture capital funding went to just three states: California, Massachusetts, and New York. He asserted that the U.S. must encourage venture capital investing activity in more rural states (such as his state of Iowa). He stated that expanding the pool of potential investors into young and private businesses would be beneficial. He asked Ms. Bell to provide recommendations for expanding the SEC’s accredited investor definition to promote capital formation in overlooked regions and communities.
  • Ms. Bell suggested that a $150,000 annual income threshold for becoming an accredited investor would be fairer and would enable more Americans to participate in private market offerings. She commented that the U.S. has a large pool of potential private market investors that are currently sidelined due to the stringent requirements for becoming an accredited investor. She also highlighted how African Americans and Hispanics currently receive less than 1 percent of venture capital funding in the U.S., despite being the fastest growing entrepreneur segment within the U.S. She remarked that expanding the SEC’s accredited investor definition would enable minority entrepreneurs to receive more venture capital investment.
• Rep. Nunn expressed agreement with Ms. Bell’s response and added that her comments would also apply to people in underrepresented regions. He then noted how the SEC had claimed that private offerings are too risky for most individuals. He asserted that the SEC’s claim underestimates the intelligence and financial sophistication of many Americans that currently do not satisfy the SEC’s accredited investor definition. He asked Ms. Bell to provide recommendations for how the SEC could determine a person’s financial sophistication without using wealth as a factor.
  • Ms. Bell noted how Black Girl Ventures is an entrepreneur support organization. She stated that Black Girl Ventures and other types of entities, such as community development financial institutions (CDFIs), could help investors to assess potential private market investment opportunities. She suggested that the U.S. could certify these organizations and entities to credential investors for the purposes of accreditation.

Rep. Gregory Meeks (D-NY):

• Rep. Meeks called it imperative for the U.S. to create more opportunities for investors that are women and people of color. He stated that access to pre-IPO investment opportunities should not just be reserved for wealthy Americans. He also raised concerns over how many minority entrepreneurs did not have access to the same investor pools as their White counterparts. He commented that this lack of access makes it more difficult for minority entrepreneurs to scale their businesses and perpetuates generational wealth gaps. He remarked however that it is also imperative for retail investors (particularly people of color) to not be taken advantage of by predatory investment practices. He asserted that the U.S. is failing to expand access to investment opportunities while ensuring that investors would receive robust investing protections. He asked Prof. Fletcher to address the types of population that the SEC’s current accredited investor definition is intended to serve. He also asked Prof. Fletcher to indicate whether alternating the SEC’s accredited investor definition would enable more people of color to access investment opportunities.
  • Prof. Fletcher noted how the SEC’s current accredited investor definition targets people of a certain income threshold. She stated that the current definition exposes senior citizens at the highest rate to the private markets and commented that senior citizens are often taken advantage of in these private investment opportunities. She remarked that adjusting the thresholds for becoming an accredited investor would expand the pool of potential accredited investors. She asserted however that these changes to the SEC’s accredited investor definition would not address the risks and issues present within the private markets, including the lack of information disclosures. She emphasized that private market offerings do not have information disclosure obligations. She noted how the other investor witnesses can obtain information about private market investment opportunities because they work on behalf of pools of investors. She stated however that the average retail investor would likely not be able to demand such information from private market companies for the purposes of making their investment decisions. She remarked that expanding the SEC’s accredited investor definition to enable minority investors to participate in the private markets would therefore lead these minority investors to lose money. She commented that these losses would exacerbate the U.S.’s racial wealth gap.
• Rep. Meeks reiterated his call for the U.S. to strike an appropriate balance between expanding access to investment opportunities and ensuring the presence of consumer protections. He asked Ms. Bell to recommend disclosures that would be best suited for prospective investors that currently do not satisfy the qualifications for becoming an accredited investor.
  • Ms. Bell discussed how companies typically undergo a due diligence process with prospective investors that involves the submission of financial reports and interviews. She stated that her organization helps to both support the development of new companies and introduce the companies to potential investors so that the companies could grow even larger. She also remarked that networks play a very important role in private market investing in terms of connecting companies to potential inventors.
• Note: Rep. Meeks’s question period time expired here.

Rep. Erin Houchin (R-IN):

• Rep. Houchin mentioned how her alma mater, Indiana University, has the Shoemaker Innovation Center. She explained that this Center helps student entrepreneurs build, launch, and sustain their own businesses through providing them with resources, programs, and support. She also mentioned how Indiana University has a prestigious business school. She further noted how her region has the Small Business Development Center, which connects angel investors with startup businesses within the region. She stated however that not everyone has access to these resources and networks and commented that these access issues are pronounced in rural areas. She asked Mr. Velasquez to address how expanding the SEC’s accredited investor definition would increase access to capital in rural areas of the U.S.
  • Mr. Velasquez remarked that increasing access to capital in rural areas of the U.S. would involve numerous reforms, including additional education and revised income thresholds for becoming an accredited investor. He mentioned how many smaller communities might have financially sophisticated university professors that do not satisfy the income thresholds for becoming accredited investors. He asserted that the pursuit of numerous reforms could help to significantly increase the pool of potential accredited investors in smaller communities, which would improve access to capital. He acknowledged however that rural communities have small populations, which means the number of angel investors in these communities is likely to be very small. He stated that expanding the ways for people to become accredited investors would help to address these issues.
• Rep. Houchin then asked Ms. Schulp to indicate whether the amount of wealth or assets under management serve as accurate representations of an investor’s sophistication.
  • Ms. Schulp responded no.
• Rep. Houchin noted how there are arguments that elderly individuals are especially vulnerable to financial schemes and frauds. She asked Ms. Schulp to indicate whether wealthy members of the elderly community are especially vulnerable to these schemes and frauds, regardless of their sophistication as investors.
  • Ms. Schulp asserted that an individual’s wealth has no impact on an individual’s sophistication as an investor. She stated that the elderly are often targets for all types of securities scams and commented that these scams are not all related to private market offerings.
• Rep. Houchin then mentioned how she had been a small business owner prior to entering Congress and stated that the launching of her business had involved risk. She asked Ms. Bell to indicate whether one could build wealth without assuming risk.
  • Ms. Bell answered no and stated that risk is inherent in entrepreneurship.
• Rep. Houchin remarked that having a vibrant and robust economy would require the U.S. to permit as many people as possible to pursue private market investment opportunities.

Rep. Stephen Lynch (D-MA):

• Rep. Lynch discussed how many failed cryptocurrency companies (such as FTX) had offered very limited disclosures to their investors prior to their collapses. He noted how the accredited investor definition has been found to be discriminatory toward underrepresented investors and act as a barrier to capital formation for minority entrepreneurs. He contended that the Subcommittee should focus less on expanding eligibility to become an accredited investor and more on expanding access to public markets. He highlighted how the public markets contain robust investor protections. He then mentioned how the Committee’s Task Force on Financial Technology had previously explored the lack of diversity amongst financial technology (FinTech) startup founders. He noted how only 2 percent of private venture capital funding had gone to women-owned companies and how less than 3 percent of this funding had gone to founders of color. He also highlighted how minority-owned companies that receive venture capital funding had outperformed White-owned companies. He expressed skepticism toward the claims that reducing the thresholds to become an accredited investor would help minority-owned companies to access safe and reliable funding. He asked Prof. Fletcher to address whether lowering the thresholds to become an accredited investor would reduce the funding discrepancies that are problematic for minority-owned businesses.
  • Prof. Fletcher remarked that reducing the thresholds to become an accredited investor would not increase access to funding for minority and women startup company founders. She stated that networks play a key role in startup company funding and asserted that these networks often exclude minorities and women. She commented that changes to the SEC’s accredited investor definition would not address this exclusion. She remarked that expanding the SEC’s accredited investor definition would instead expand the pool of potential victims in this space because of the current lack of investor protections. She concluded that reducing the thresholds to become an accredited investor would not increase access to funding for minority and women-owned businesses.
• Rep. Lynch asked Prof. Fletcher to address how the U.S. could improve access to capital for minority and women-owned businesses while maintaining adequate investor protections and disclosures.
  • Prof. Fletcher stated that if the U.S. is to expand access to its private markets, then the U.S. should adopt additional disclosure requirements for the private markets. She commented that the disclosure requirements for the private markets do not need to be as stringent as the disclosure requirements currently present in the public markets. She also mentioned how government lending programs could provide access to capital for minority and women-owned businesses. She then discussed how the SEC has Regulation Crowdfunding, which enables smaller businesses to raise money through funding portals of up to $5 million. She stated that policymakers should first consider the policies before reducing the thresholds to become an accredited investor.

Rep. Bryan Steil (R-WI):

• Rep. Steil recounted how one of his constituents had recently called his office to complain that the SEC’s current accredited investor definition had prevented him from investing in early-stage companies. He mentioned how this constituent had asserted that the SEC’s accredited investor definition impedes social mobility and is unfair. He expressed agreement with his constituent’s concerns and commented that his constituent’s experience is probably common. He asked the witnesses to indicate whether they are accredited investors, to which four of the witnesses indicated that they are accredited investors (Note: The identity of the witnesses that answered affirmatively to the question were not indicated in the hearing’s video). He then asked the witnesses to indicate whether they had been accredited investors for over ten years, to which only Mr. Olivencia answered affirmatively. He called this response concerning given the level of investing expertise amongst the witnesses. He stated that Congress could remedy his concerns through expanding the SEC’s accredited investor definition. He then noted how Mr. Velasquez had not been able to qualify as an accredited investor for a long period of time, despite his extensive experience working with small companies to secure funding. He asked Mr. Velasquez to describe how the SEC’s current accredited investor definition excludes investment professionals that come from minority backgrounds and that lack family wealth.
  • Mr. Velasquez remarked that the SEC’s current accredited investor standard limits the ability of these investment professionals to participate in private market offerings. He mentioned how his organization had experienced challenges in finding potential minority investors. He testified that it had taken his organization four years to build its network of 800 investors. He stated that his organization is focused on creating pathways for minority communities to access investment opportunities.
• Rep. Steil asked Mr. Velasquez to respond to the arguments that the SEC’s current accredited investor definition is necessary to protect investors.
  • Mr. Velaquez testified that the Angel Capital Association has 16,000 members and 250 angel investing networks, platforms, and family offices. He asserted that the Association’s members are not observing fraud within the private markets and noted how these members are reviewing thousands of deals each year. He stated that poor performance is a more pervasive problem than fraud within the private markets. He also indicated that while FTX’s investors might have been deemed accredited, he asserted that these investors had not been sophisticated.
• Rep. Steil asked Ms. Bell to indicate whether the SEC’s accredited investor standards are justified and necessary to protect investors.
  • Ms. Bell answered no and stated that an investor’s sophistication level should not be determined solely based on an investor’s wealth.
• Rep. Steil reiterated his support for reforming the SEC’s accredited investor definition.

Subcommittee Ranking Member Brad Sherman (D-CA):

• Ranking Member Sherman remarked that private markets are important and inherently risky. He noted how these markets tend to lack the same levels of information and liquidity as public markets. He stated that the U.S. should be rationalizing (rather than lowering) standards for these markets. He asserted that wealth should not serve as a barrier to investing in private markets and commented that sophistication should determine whether people can invest in these markets. He stated that the U.S. must define what constitutes a sophisticated investor and whether a person could satisfy sophistication requirements through hiring an investment advisor. He added that any such investment advisor must be independent.

Subcommittee Chairman Ann Wagner (R-MO):

• Chairman Wagner called on Congress to expand opportunities in the securities markets for all investors and entrepreneurs. She commented that such expansions would be necessary to support long-term sustainable growth.