The Investor Choice Advocates Network (ICAN) has filed a writ of mandamus seeking to compel the SEC to review its definition of “accredited investor,” sparking renewed debate over a long-standing rule that governs participation in private investment markets. At the heart of the issue is whether the current standard, which limits eligibility based on income or net worth, strikes the right balance between protecting investors and fostering economic growth.

What is the Accredited Investor Rule?

The SEC’s accredited investor rule, established under Regulation D of the Securities Act of 1933, is designed to limit investment in private offerings to individuals and entities deemed capable of bearing the financial risks. Currently, an individual qualifies as an accredited investor if they:

• Earn at least $200,000 annually (or $300,000 jointly with a spouse) for the past two years, with a reasonable expectation of the same in the current year, or

• Have a net worth exceeding $1 million, excluding the value of their primary residence.

This rule was created to protect less-experienced investors from the high risks associated with private investments, which lack the same transparency and regulatory oversight as public markets.

Arguments in Favor of Maintaining the Rule

1. Investor Protection: Private investments are inherently risky, often illiquid, and lack the disclosure requirements of public securities. The wealth thresholds act as a proxy for sophistication, ensuring that participants can afford to lose their investment without severe financial hardship.

2. Simplicity and Clarity: The current rule provides a clear, objective standard. Moving to a more subjective framework—such as assessing financial literacy or experience—could introduce complexity, increase compliance costs, and lead to inconsistent application.

3. Focus on Public Markets: Public markets offer ample opportunities for retail investors, including exchange-traded funds (ETFs) and other diversified vehicles, reducing the need to access riskier private offerings.

Arguments for Revising the Rule

1. Expanding Access: Critics argue that the income and net worth thresholds exclude many individuals with relevant financial expertise or experience, such as successful entrepreneurs or professionals who manage significant budgets.

2. Economic Growth: Broadening the investor pool could increase capital flows to startups and small businesses, fostering innovation and economic development.

3. Wealth Bias: The current rule favors inherited wealth over experience or education. A trust fund heir qualifies automatically, while a financially savvy professional earning below the income threshold does not.

The Path Forward

ICAN’s petition asks whether the SEC’s definition aligns with modern realities, particularly as access to financial education and tools has expanded. However, any changes to the rule must balance the need for broader participation with the imperative of investor protection. The SEC has periodically adjusted the thresholds to account for inflation and added certain qualifications, such as allowing licensed financial professionals to qualify regardless of income or net worth. Whether further changes are warranted remains a subject of robust debate.

As the legal process unfolds, the outcome could have significant implications for private markets, investors, and the broader economy. Both sides of the debate highlight important considerations, and any decision will likely require navigating the tension between innovation and regulation.

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