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1 [1] (February 3, 2023)

handle is hein.crs/govekln0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 Updated February 3, 2023 Accredited Investor Definition and Private Securities Markets Companies turn to capital markets to raise funding from investors, a process referred to as a securities offering. Public securities offerings are open to a wide range of investors and must meet comprehensive registration requirements imposed by the Securities and Exchange Commission (SEC). By contrast, private securities offerings are exempt from certain SEC registration requirements and are generally available only to accredited investors. Hence, the accredited investor definition effectively determines who can access the private securities markets and invest in privately held companies or offerings by private funds, such as hedge funds, venture capital, and private equity. Private Securities Offerings: Market Size, Risks, and Trade-offs The scope of the accredited investor definition has taken on greater significance in light of increases in the volume of private securities offerings. Between July 1, 2021, and June 30, 2022 (FY2022), companies raised roughly $4.5 trillion through private offerings-several times the size of public offerings (Figure 1). Figure 1. New Capital Raised in Public and Private Securities Offerings ($trillions) FY 2O2L FY202 2 Source: CRS using data from SEC Office of the Advocate for Small Business Capital Formation annual reports. Note: FY = fiscal year ends on June 30. T = $trillions. Although private securities offerings are growing in popularity, they also present investors with greater risks than public offerings. Some of these risks derive from private offerings' reduced disclosure relative to public offerings. Without more comprehensive disclosure, investors in private offerings may be less able to make informed decisions regarding risks and pricing. In addition, private offerings are generally issued by small, medium- sized, and start-up companies, which tend to be riskier investments compared with more established publicly traded companies. Private offerings are also less liquid than public offerings, meaning that investors may have more difficulty selling these securities at desired prices and could incur losses if they are forced to sell to meet urgent cash needs. In regulating capital markets, the SEC must balance two of its statutory mandates: investor protection and capital formation. Through the exemptions for private offerings, the SEC allows companies to raise capital without incurring the costs associated with the registration and disclosure requirements governing public offerings, while ensuring that the investors who participate in such private offerings have sufficient sophistication to take care of themselves without the protections afforded by certain securities law requirements. Capital formation needs may be better met if issuers can raise funds without incurring registration costs, but investor protection challenges potentially increase as more investors gain access to private offerings. The Accredited Investor Definition Under the SEC regulations, an individual must meet one of two financial criteria to qualify as an accredited investor (Figure 2). Figure 2. Who Is an Accredited Investor as Measured by Income and Net Worth? Net Worth exceeds Source: Financial Industry Regulatory Authority. An individual can qualify as an accredited investor if (1) he or she earned more than $200,000 (or $300,000 together with a spouse) in annual gross income during each of the prior two years and can reasonably be expected to earn a gross income above that threshold in the current year or (2) he or she has a net worth of more than $1 million (either alone or together with a spouse), excluding the value of the primary residence. Effective December 8, 2020, the SEC expanded the accredited investor definition to include some natural persons with financial expertise, such as (1) individuals with certain financial credentials (e.g., Series 7, Series 65, or Series 82 licenses); (2) knowledgeable employees as defined in Rule 3c-5(a)(4) of the Investment Company Act of 1940 (P.L. 76-768), which includes the

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