An Investor Who Didn’t Qualify as ‘Accredited’ Is Suing the SEC

The Securities and Exchange Commission is facing a legal challenge to its accredited investor rule, the policy that limits access to many private markets based on an investor’s income, wealth, or professional credentials.

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The plaintiffs are a Texas healthcare professional and Healthcare Shares, a public-benefit corporation that operates a venture capital fund investing in healthcare start-ups that it says would benefit from a broader investor pool.

The SEC’s accredited investor rule deems individual investors eligible for access to private placements if they have annual incomes of $200,000 ($300,000 for a married couple), a net worth of $1 million or more (excluding their primary residence), or if they hold certain securities or investment advice licenses.

The individual plaintiff is Emily Kapszukiewicz, whom the lawsuit states has an annual income of $195,000 and net worth of $850,000, falling short of two of the thresholds. But the lawsuit describes Kapszukiewicz, who holds a master’s in applied economics, as a seasoned professional who has “demonstrated financial sophistication” over the course of her career.

The plaintiffs say their basic argument is about fairness. “America faces a historic wealth gap crisis, and the U.S. Securities and Exchange Commission’s regulations are making it worse,” the lawsuit states. “While anyone can place bets on sports or play poker for money from their phone, the SEC’s ‘accredited investor’ rule effectively excludes the vast majority of Americans from accessing private investment opportunities—the very opportunities that have historically generated great wealth for American families.”

The SEC didn’t immediately respond to a request for comment.

The lawsuit argues that the financial restrictions of the accredited investor rule are “arbitrary and capricious” and ultimately violate the Constitution. The plaintiffs are asking a federal court in the Northern District of Texas to overturn that portion of the rule.

The lawsuit was organized by the Investor Choice Advocates Network, a nonprofit organization that has previously petitioned the SEC to review the accredited investor rule.

The accredited investor framework was intended as a safeguard to prevent unsophisticated investors from getting pulled into private investments that could be exceedingly complex, risky, or carry high fees. But critics have increasingly been objecting to the formula that equates wealth with financial sophistication.

In June, the U.S. House of Representatives passed a bill that would expand the eligibility for an accredited investor to include individuals with relevant professional experience, explicitly including registered brokers and investment advisors and tasking the SEC to produce a more expansive framework to determine who qualifies.

In the Senate, Banking Committee Chairman Tim Scott (R., S.C.) has written a bill that would establish a certification test that the SEC or other regulators would administer to determine whether an individual qualifies for private markets. It would also allow individuals to self-certify as accredited investors, allowing them to invest up to 10% of their income in private securities.

Those advocates for reform, along with the plaintiffs in the Texas lawsuit, argue that the accredited investor rule has been exacerbating inequities between wealthy and nonwealthy investors as more young and promising companies eschew the public markets and opt to remain private.

“This barrier is particularly damaging given the declining number of publicly traded companies today, leaving average investors with limited investment choices,” the complaint states. “Meanwhile, the vast landscape of private investment opportunities—including promising start-ups, growing private companies, and innovative ventures—remains accessible primarily to the wealthy.”

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