H.R. 1585, Fair Investment Opportunities for Professional Experts Act

Floor Situation

On ­­­Wednesday, November 1, 2017, the House will consider H.R. 1585, the Fair Investment Opportunities for Professional Experts Act, under suspension of the rules. H.R. 1585 was introduced on March 16, 2017, by Rep. Dave Schweikert (R-AZ) and was referred to the Committee on Financial Services, which ordered the bill reported by a vote of 58-2 on October 12, 2017.

Summary

H.R. 1585 amends the definition of accredited investor under the Securities Act of 1933 (Securities Act).  Under this legislation, an accredited investor will include any individual:

• whose individual net worth, including their spouse’s, exceeds $1 million;
• with an income greater than $200,000 individually, or $300,000 jointly;
• with a current securities-related license; or
• who the U.S. Securities and Exchange Commission (SEC) determines has demonstrated education or job experience to qualify as having professional subject-matter knowledge to a particular investment. Such education or experience must be verified by the Financial Industry Regulatory Authority or an equivalent self-regulatory organization.

Background

The SEC is an independent regulatory agency responsible for administering Federal securities law.  It has broad regulatory authority over the securities industry, including stock exchanges, mutual funds, investment advisers, and brokerage firms.[1]

The SEC’s  Advisory Committee on Small and Emerging Companies has found that the majority of new jobs in the United States are generated by companies less than five years old.[2]  The ability of these companies to raise capital is critical to the economic well-being of the United States. Under current law, companies are required to register with the SEC prior to raising funds through public and private offerings.[3] The Securities Act contains certain exemptions from registration and authorizes the SEC to provide additional exemptions. Regulation D, which the SEC promulgated to provide such exemptions, is based on the Securities Act provision stating that the obligation to register with the government does not apply to any transaction by an issuer not involving a public offering.  The Supreme Court has previously ruled that an offering would be considered private and not public when “the particular class of persons affected needs the protection” of securities laws and should utilized only by persons who can “fend for themselves.”[4] To further define individuals who can “fend for themselves,” the SEC adopted the term “accredited investor.”

Under the SEC’s standards, an investor’s financial status is a proxy for his ability to fend for himself. As it currently stands, a natural person is an accredited investor if that person (1) earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or (2) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).[5]

In 2015, the Investor Advisor Committee recommended changes to the definition of accredited investor to allow additional investors to participate in private offerings even if they do not satisfy the net worth test so long as they have the appropriate risk appetite and ability to understand the private offering.[6]  The Committee suggested that individuals could be accredited investors if they had adequate financial sophistication, education or professional credentials, or expertise as demonstrated by the successful completion of an exam demonstrating their investment knowledge.[7] H.R. 1585 expands the definition of an accredited investor to include persons who meet certain financial education standards.

In the 114th Congress, the House passed similar legislation, H.R. 2187, by a vote of 347-8.

Cost

The Congressional Budget Office (CBO) estimates that enacting H.R. 1585 would cost less than $500,000 for rulemaking activities related to the change in the definition of an accredited investor.

Staff Contact

For questions or further information please contact Jake Vreeburg with the House Republican Policy Committee by email or at 2-1374.