Introduction: A Shift in Investment Strategy
In recent weeks, President Trump has taken significant strides to attract foreign investment to the United States. One notable initiative is the proposed Gold Card, which would enable foreign investors to obtain legal residency in the U.S. with a $5 million investment. Additionally, during his Joint Address to Congress, he highlighted a substantial $200 billion direct investment from Japan’s SoftBank as a testament to the potential of foreign capital.
The Overlooked Domestic Investment Potential
While encouraging offshore investment is commendable, the U.S. government is overlooking a vital source of capital within its borders. The accredited investor rule, which requires individuals to possess a net worth exceeding $1 million or an annual income over $200,000, effectively excludes a significant portion of the American population from participating in the most lucrative securities markets. It is high time to reconsider this regulation.
Understanding Securities: Public vs. Private
In the landscape of U.S. securities, there are two primary categories: public and private. Public securities are available to all investors and trade freely on national exchanges, but the process for companies to “go public” is fraught with complex regulatory and compliance challenges. As a result, many firms, including notable names like Stripe and SpaceX, are opting to remain private.
However, the private market comes with strict limitations. In exchange for reduced regulatory burdens, access is restricted to accredited investors. This exclusion means that approximately 80% of American households are barred from investing in private offerings, which limits their ability to build wealth alongside flourishing companies.
The Changing Landscape of Investment Opportunities
Historically, public markets served as the primary source of capital for high-growth companies, benefiting the public by providing access to the best investment opportunities. However, this scenario has evolved. According to SEC Commissioner Hester Peirce, the allure of becoming a public company has diminished. Recent trends indicate that private markets are expanding at nearly double the rate of global public equity markets, largely due to a single SEC rule.
Examining the Accredited Investor Rule
The accredited investor rule, codified as 17 CFR § 230.501(a), is a regulation from the SEC that limits access to private investments. This rule establishes criteria that investors must meet to engage in offerings such as Regulation D, the primary exemption private companies utilize to raise capital. Consequently, millions of Americans are effectively barred from investing in promising enterprises.
While proponents of the rule argue for its necessity, claiming that financial resources are the only true safeguard against potential losses, this viewpoint is fundamentally flawed. It assumes that the public requires protection from itself, yet the accredited investor rule merely serves to restrict access to investments in groundbreaking companies like OpenAI, Anthropic, and Perplexity.
Proposed Changes: The Test-In Approach
Last year, Senator Tim Scott introduced the Empowering Main Street in America Act (EMSAA), which included a provision for a test-in approach to the accredited investor definition. This proposal has several advantages:
1. **Fairness**: Any American who meets the criteria can invest.
2. **Equitable Economic Participation**: Broader access to private markets allows a wider range of Americans to benefit from economic growth.
3. **Enhanced Market Utility**: Expanding private markets increases their overall usefulness.
However, there’s no need for new legislation to implement a test-in approach. The SEC has the authority to enact this change under Sec. 2(a)(15) of the Securities Act of 1933. Therefore, amending the accredited investor rule could be achieved through simple rulemaking, without significant legal challenges. The SEC should take action to revise the rule promptly.
Conclusion: A Call for Action
As the investment landscape continues to evolve, it is essential that the accredited investor rule be reformed to reflect the current economic environment. Ensuring that all Americans have the opportunity to participate in private markets is not just a matter of fairness; it is a necessary step toward fostering inclusive economic growth and innovation. The time for change is now.
