Equal Opportunity for All Investors Act of 2023

On May 31, 2023, the U.S. House of Representatives passed The Equal Opportunity for All Investors Act of 2023 (the “Bill”). If enacted into law, the Bill would revise the definition of “accredited investor” under Regulation D of the Securities Act of 1933 to include any person who is certified through an examination established by the U.S. Securities and Exchange Commission (SEC).

The Bill requires that such examination must:

• be designed with an appropriate difficulty level such that an individual with financial sophistication would be unlikely to fail;
• include methods to determine competency around different types of securities, private and public company disclosure requirements, corporate governance, financial statements, potential conflicts, and aspects of unregistered securities that include risks associated with limited liquidity and disclosures, among other potential pitfalls; and
• be administered by a registered national securities association and offered free of charge to the public.

Generally speaking, offers and sales of securities require registration under applicable state and federal securities laws, unless an exemption from registration applies. In the venture capital world, the most widely used exemptions require some or all proposed purchasers to be “accredited investors,” which include individuals with sufficient net worth or annual income to be deemed under the law as not needing the rigorous investor protections otherwise applicable under applicable securities laws. Exemptions from registration facilitate fast and cost-effective capital raising by private companies and funds.

In recent years there have been attempts to democratize angel and venture capital investments in small businesses and startups, and the funds that support them:

• In 2012, the JOBS Act legitimized the general solicitation of capital through crowdfunding over the internet. When the JOBS Act was enacted, the start-up community touted its potential to significantly disrupt the ecosystem of early-stage financings by adding more prospective purchasers to the angel and venture capital communities. Unfortunately, required use of licensed intermediaries, burdensome verification and reporting requirements, and limits on amounts able to be raised from individual investors have made crowdfunding less appealing to securities issuers. An unintended consequence of the JOBS Act and the proliferation of crowdfunding was the new use of previously existing exemptions to encourage even more participation in early-stage investing by individual accredited investors through platforms like AngelList and FundersClub.
• In August 2020, the SEC adopted amendments to the definition of “accredited investor.” These amendments created new categories of accredited investors, including those individuals who qualify irrespective of wealth, on the basis that they have the requisite ability to assess an investment opportunity (e.g. by holding professional credentials such as a FINRA Series 7 or 82, or NASAA Series 65).

The Bill, which will now move to the U.S. Senate for consideration, builds upon the 2020 amendments by ensuring that newly eligible accredited investors have the knowledge and sophistication required to properly evaluate investment opportunities that are not subject to the rigorous disclosure and ongoing reporting requirements of public companies and other reporting issuers, and that may be illiquid for a significant period of time.

The expansion of the accredited investor definition under the Bill could materially improve opportunities for private company investment. Brown Rudnick will continue to monitor the implementation of the Bill, and other issues affecting the emerging company and venture communities, and we look forward to helping our clients deploy and close on the capital needed to grow great companies.