A Raw Deal - The Accredited Investor Rule
Under “New Deal” era policies, the Securities and Exchange Commission (“SEC”) authored an “accredited investor” definition for individuals that stifles wealth creation for all Americans, but disproportionately for Black Americans and other historically oppressed groups (i.e., women and people of color). This definition, found under Rule 501 of Regulation D, requires individual investors to meet a financial literacy "means test" (reminiscent of voter literacy tests) to invest freely in private market offerings like tech company startups. The current criteria bars individual non-accredited investors (those who don’t meet income/net worth or "sophistication" criteria) from participating in some startup offerings altogether while allowing separate and unequal participation in others.
Foundation of Systemic Racism in Startups
While the majority of "White" Americans were excluded from the accredited investor status, contemporaneous “redlining” policies practiced by the Federal Housing Association (FHA) and Home Owners’ Loan Corporation (HOLC), created affirmative actions for White Americans to invest in low cost real estate, while explicitly excluding Black Americans and predominantly Black communities. These policies and related practices, such as housing covenants, cemented the current wealth gap by limiting Black American’s ability to accumulate and leverage equity for education, entrepreneurship, and other endeavors. While outlawed under the Fair Housing Act of 1968, the damage was done, and additional retrenchments, including the FBI's COINTELPRO, and subsequent initiatives, further deteriorated Black communities.
While covert, the SEC's segregation of investors via the accredited investor definition is likewise a relic of institutional racism. Designed to appease Southern Democrats during the "New Deal" era, this rule differs from its real estate counterpart in that it deploys what is known as the "Southern Strategy" or "Operation Dixie": the rule uses "dog whistle" rhetoric that appears non-racist – even gallant – on the surface, but has implicitly racist underpinnings.
The accredited investor definition should be updated to allow investors to self-certify as accredited by virtue of sophistication or access to sophisticated counsel (such as lawyers, Certified Public Accountants (CPAs), and advisors). Such an update would enable the SEC to provide to prospective investors an appropriate disclosure of risks and gather data while facilitating more equitable capital formation and wealth creation for founders and funders disadvantaged by the current definition. This, in turn, will help close the wealth gap, boost startup job creation, and invigorate the U.S. economy.
Tests of Sophistication Perpetuate Harm
This scene from the movie, Selma film, exemplifies how voter literacy tests denied Black voters their right to vote. Should financial literacy tests, professional designations, or educational attainment be used to deny the right to build wealth? How can the SEC justify the harm done to investors by denying them equitable access to wholesale investment opportunities based on arbitrary indicators of sophistication? Why should "unsophisticated" investors with access to sophisticated counsel and advisors be denied opportunities to invest?
Change Can't Wait
On August 26, 2020, the SEC made modest and insufficient changes to the accredited investor definition which include professionals holding FINRA Series 7, 65, and 82 licenses. These are expensive, time consuming, and unduly burdensome financial literacy / sophistication tests. The majority of Commissioners agree that this falls short of solving the problems the definition creates. However, all fail to acknowledge the harm that the rule perpetuates. The SEC’s discriminatory finance practices contribute to the loss of an estimated 9 million jobs and $300 billion in collective national income.
The SEC's mandate for investor protection is to ensure companies provide appropriate disclosure. In doing so, the SEC should not usurp Americans' financial autonomy. The “Black Wall Streets” of Tulsa, Rosewood, and countless other black communities, demonstrate that investors, even those formerly enslaved, or one generation removed, can govern their own financial affairs if afforded the opportunity. To delay fully democratized access to the private market defies both the overwhelming public interest in racial equity and the mandates that the Commission was created to steward.
Under Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act "the Dodd-Frank Act," additional review is required in or before 2023:
"...not less frequently than once every 4 years...the Commission shall undertake a review of the definition, in its entirety, of the term ``accredited investor'', as defined in section 230.215 of title 17, Code of Federal Regulations, or any successor thereto, as such term applies to natural persons, to determine whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy."
The SEC has the authority to revise these regulations that relegate the vast majority of American natural persons to “second class” status based on income and net worth. This project calls on the SEC dismantle these discriminatory investor criteria per Section 413(b)(1)(A) of the Dodd Frank Act to:
Protect investors from the continued economic harm resulting from investor segregation into separate and unequal opportunities the economy
To address the public interest of closing the wealth gap to increase opportunities for all; and
To accelerate economic recovery.
Main street can't afford to endure continued relegation to "retail investor" status - with 401Ks and savings at the mercy of Wall Street - while the rich get richer through access to top tier wholesale opportunities to invest (when shares are a fraction of a cent). All Americans deserve the right to hedge, recover, build, and diversify in the private and public markets. Be part of the change!
Sign the petition to Stop Startup Redlining, and share with others!
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