Expanding Access to Capital Act of 2023
Floor Speech
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Mr. SHERMAN. Mr. Chair, I rise in opposition to the bill. It is not a good bill. We have some amendments that will make it slightly better, but it still won't be a good bill. All the Democrats on the Financial Services Committee voted against this bill in committee.
Let's give a little background here. The gold standard is a public offering of securities. They then become registered securities. They can trade on an exchange. They provide disclosures to investors and audited financial statements.
We do have exceptions to this rule--exceptions for small offerings and exceptions where you are going to have accredited investors who have the capacity to absorb an enormous amount of risk and the capacity to evaluate the investments.
The definition of an accredited investor was criticized by the chair of the full committee when he was here, and I agree that definition should change. Right now, it is focused too much just on wealth and income. We need, instead, to also allow people to be accredited investors if they have the expertise to evaluate the investment and are not putting too much of their own resources into one illiquid investment. We also need to take a look at the expertise that an investor may not have himself or herself but can acquire through truly independent advisers.
The fact is that the definition of accredited investor should be improved, and that is why this House passed and sent to the Senate bills that would improve it, and I hope the Senate will finally take action on those bipartisan pieces of legislation.
This bill doesn't really improve the definition of accredited investor. It says that you are an accredited investor if you sign a piece of paper saying you want to be an accredited investor, self- certification. That shreds investor protection.
This bill not only guts investor protection when it comes to the definition of accredited investor, but it also locks in a system in which a company can say they are a private company even though they have thousands of owners--thousands. You can have 2,000 or more owners because you may have an investment vehicle that has hundreds of investors of its own, and it counts as only one investor toward that 2,000.
That means that a lot of companies will never go public. That means that those investors who want investor protection and want the liquidity of being able to sell their shares on an exchange will never be able to invest. It means that these companies will not provide the audited financial statements and the other disclosures that are required of public companies.
It guts the concept of being a public company. Why is that so important? Because today, the SEC published climate disclosures required of public companies, and today, we are considering a bill that is designed to truncate the number of public companies that we have.
If you care about the economy, vote ``no.'' If you want to protect investors, vote ``no.'' If you want to protect our climate, vote ``no.''
This bill would open the door to investors placing their entire nest eggs in private securities with insufficient transparency, no audited financial statements, and no liquidity. Vote ``no.''
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Mr. SHERMAN. Madam Chair, in the debate on the bill in chief, the chair of the full committee correctly criticized the definition of accredited investor as it occurs under current law.
Accredited investor is an important concept in securities law because, Madam Chair, when you have a private offering, one that hasn't gone through the SEC process, the amount that can be raised and the number of investors you can have are related to, in large part, how many of your investors are accredited.
The current definition makes you an accredited investor if you earn over $200,000 a year or have a net worth of more than $1 million. Frankly, the fact that you have that level of income or that level of wealth does not show that you have particular expertise or that your adviser team has particular expertise. While it certainly shows that you are in a position to absorb a loss, no one can afford to absorb a loss of 100 percent of their net worth.
We need a different definition of accredited investor, one that does not limit that status just to those who happen to be wealthy or have a high income.
The bill before us here does provide that different definition by saying you are an accredited investor, first, if you acknowledge the risks that you are taking and, second, if you are investing less than 10 percent of your net worth in the securities offering so that you can afford a loss on what, after all, is a higher risk--as many people have pointed out--offering about which you get less information.
The problem with the bill in chief using that 10 percent standard is twofold. First, it includes in your net worth your primary residence. If you happen to have a $1 million home, you could take out a $100,000 mortgage on it and invest all $100,000 in one relatively risky investment.
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Mr. SHERMAN. You have literally bet your house on an investment that is of a type that is risky and where you get less information and where the investment is illiquid. That is not good investor protection.
What this amendment does is it says, yes, we are going to look at what portion of your net worth you are investing, but we are going to take a look first at your net worth excluding your primary residence because very few people feel they can afford to lose their house; second, that you cannot invest more than 10 percent of your net worth in any single offering or more than 25 percent of your net worth in all these private offerings.
Therefore, we look at wealth, excluding your home so you don't risk losing your home, and we look at not only how much you are investing in the particular investment, but how much you are investing overall.
I want to correct one thing. This amendment limits it to, excluding your primary residence, 5 percent of your net worth on any one private offering, and no more than 25 percent of your net worth, excluding your primary residence, on all such private offerings.
Madam Chair, I urge adoption of this amendment. I think it gives us a better definition of those who can afford the risks and the risk of liquidity that comes with these private investments.
The risk of liquidity is there. You may think, well, I made an investment and it is going to pan out, but if you need the money and you can't liquidate the investment on a fair basis, it is almost as if the investment failed.
Therefore, we are talking higher risk, less liquidity. We limit it under this amendment to 5 percent of your net worth on any one deal, 25 percent of your net worth on all such deals. Also, when we look at your net worth, we exclude your personal residence. These are not situations where you should be betting your home.
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Mr. SHERMAN. Madam Chair, let me respond to those comments.
The underlying bill acknowledges the fact that the government puts some restrictions on how much of your net worth you can put into one of these unregulated, risky, low-information, illiquid investments. Therefore, to say that we have clashed with some great principle of personal freedom in my amendment because it says 5 percent, but that it is consistent with the same great overriding principle of personal autonomy when you back a bill that says 10 percent, defies logic.
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