Small businesses need more access to capital, and small investors need more investment options. Those were the prevailing messages at Wednesday’s hearing by the House Subcommittee on Capital Markets, part of the House Financial Services Committee.
Entitled “Sophistication or Discrimination? How the Accredited Investor Definition Unfairly Limits Investment Access for the Non-wealthy and the Need for Reform,” the hearing explored broadening the definition of an “accredited investor”—individuals permitted to invest in early-stage private companies. Under current law, to be accredited investors must be worth over $1 million, earn over $200,000 in annual income, or obtain a securities trading license.
“Congress must modernize the outdated accredited investor definition and expand the number of individuals who qualify as accredited investors to open up more funding opportunities for all entrepreneurs,” said the subcommittee’s chair Rep. Ann Wagner (R-Miss.).
The hearing featured five witnesses: three founders of race and/or gender-based venture capital firms, one Libertarian from the Cato Institute, and a Duke University professor.
One witness, Omi Bell, founded Black Girl Ventures, whose mission is to provide capital to “Black/Brown woman-identifying founders,” according to its website. The firm hosts rapid-fire pitch sessions—modeled after the popular reality TV show Shark Tank—and claims to have funded over 450 women of color.
“Our organization has provided over $3 million in early funding,” Bell said in her testimony, highlighting the irony that she personally remains unaccredited. “Under the current definition of accredited investor, I was not sophisticated enough.”
Witness David Olivencia, CEO of Angeles Investors, discussed his 2-year-old Hispanic-focused venture capital fund.
“I learned that less than 2 percent of the venture funds went to Hispanic founders,” Olivencia said, describing his early experience in venture capital. He decided to found his own company “rather than complaining about the issue.”
Businesses seeking an investment from Angeles Investors can fill out an application, which states that “companies must have Latinx DNA” and asks firms to identify which roles are occupied by Latinx individuals.
Rep. Bill Huizenga (R-Mich.) praised the founders for their capitalist spirit and suggested regulators remove more barriers to seed funding.
“You are the stories that made America what it is, this entrepreneurial juggernaut that we are,” the congressman said. “The fact that government can’t recognize that is just baffling.”
Black Girl Ventures and Angeles Investors did not respond to a request for comment.
Both witnesses and subcommittee members strongly criticized the current accreditation law’s $1 million wealth threshold.
“That’s a 1982 definition. So it’s either wrong then or it’s wrong now, but it’s a completely different amount of money,” said ranking member Rep. Brad Sherman (D-Calif.).
Jennifer Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives, pointed out that approximately 90 percent of Americans do not meet the threshold and said net worth is irrelevant . “Being wealthy is no proxy for financial sophistication,” she said in her testimony.
“The idea of allowing some sort of test for accredited investors to qualify is an interesting one,” Schulp added, while expressing skepticism that financial regulators would be sufficiently competent to administer such a test.
Private markets may be too risky for retail investors, one witness contended.
Lone dissenter Gina Gail Fletcher, law professor at Duke University, attacked the premise that expanding the accreditation pool would help less fortunate investors as “perverse logic at best.” Fletcher argued that looser requirements are “not going to result in more investors becoming millionaires” and instead would “expand the opportunities for wealth extraction and amplify wealth inequality.”
“Private market investors face greater fraud risks than in the public market,” she added. Fletcher proposed compelling private companies to disclose more information and administering a knowledge test to would-be investors.
The hearing comes just days after last Friday’s ruling that found Tesla founder Elon Musk not liable in a class-action securities fraud trial. Musk was fined $40 million by the Securities and Exchange Commission—which primarily oversees public companies—over the same tweets which were exonerated in the privately initiated class-action lawsuit.
Some economists take issue with the premise that the government must be involved in capital markets in the first place.
“It’s a bit rich for the federal government to pose as the ‘protector’ of the little investor from fraudulent or risky investments, when Social Security and Medicare are dozens of trillions in the hole and the SEC ignored warnings about Bernie Madoff for years,” economist Bob Murphy told the Epoch Times.
Murphy, a senior fellow at the Mises Institute think tank, argued that a free market gives investors the most choices, allowing them to seek out private firms for due diligence or stick to safer low-yield instruments. Over-regulating narrows the window of opportunity for the poor, while creating exclusive opportunities for the rich, the economist said.
“There is a bit of an Old Boys’ Club where only the people already rich are legally allowed to get into possibly lucrative investments that pay above-average returns.”