Sen. Tim Scott wants to open private markets to more ordinary investors

'My suspicion is that if [Scott’s bill] passes, then the number of Main Street investors who are sold an unregistered security will far exceed the number of Main Street investors who actually go looking for such a product,' an advisor says.

A leading Senate Republican on financial policy wants to open private-market investing to more people who currently don’t meet the net worth or income thresholds to qualify.

Expanding the pool of accredited investors is one plank in a proposal to reform capital markets released Thursday by Sen. Tim Scott, R-S.C. and ranking member of the Senate Banking Committee.

The proposal is a framework for a pending bill, the Empowering Main Street in America Act, that would boost capital formation by reforming regulation of public and private financial markets. The goal is to “help entrepreneurs, small businesses, and newly public companies more easily access the funding necessary to expand their operations and create jobs,” the framework states.

Scott said in a statement: “All Americans should be able to invest amounts of their choosing in order to grow wealth and build their communities, and our small business owners should be able to access funding in the same way large corporations do.”

The framework doesn’t provide details about what kind of accredited investor reform would be included in the bill. Legislative language has not yet been released. The measure presumably would build on efforts by the SEC and Congress in recent years to add to the ranks of sophisticated investors.

“Currently, the rules around accredited investor are arbitrary, and Ranking Member Scott is looking at ways to incorporate different qualifications focusing on education and knowledge, and qualitative over quantitative criteria, to strike a better balance,” Ben Watson, a Scott spokesperson on the Banking Committee, wrote in an email. “Based on the current wealth thresholds, minority groups like Black and Latinos continue to be excluded from the accredited investor definition at higher rates, and we are hoping to change that.”

Investors must meet certain thresholds — more than $1 million, in net worth, not counting home value or annual income of $200,000 or more for individuals — to qualify as sophisticated investors who can purchase unregistered securities, or private placements.

Proponents of loosening accredited investor rules say that more investors should have an opportunity to take advantage of growth in the private markets. Skeptics, including state securities regulators, warn that opaque and risky private placements often are the cause of investor harm.

The Consumer Federation of America opposes making the accredited investor standard more permissive.

“The existing definition of accredited investor is too expansive,” said Micah Hauptman, CFA director of investor protection. “It captures a pool of investors that don’t have the necessary sophistication to properly value private securities, the ability to withstand potential losses associated with private securities or the ability to gain access to critical information that would enable an informed decision about whether to invest in private securities.”

Ron Strobel, owner of Retire Sensibly, doubts there’s much pent-up demand among ordinary investors for private placements.

“My suspicion is that if [Scott’s bill] passes, then the number of Main Street investors who are sold an unregistered security will far exceed the number of Main Street investors who actually go looking for such a product,” Strobel wrote in an email.

The pending bill would aim to boost a “broader swath of entrepreneurs,” including women, veterans and minorities, and increase capital raising in rural and other nonmetropolitan areas, the framework states. It also would include reforms of the Securities and Exchange Commission, such as requiring more thorough cost-benefit analyses of regulatory proposals.

Republican critics of SEC Chair Gary Gensler assert that he has not devoted any time to capital formation issues despite what they see as an expansive agenda. That complaint was raised again in a hearing Thursday of a House Financial Services subcommittee.

The American Securities Association, which represents regional financial firms, backs what it calls Scott’s effort to modernize capital market regulation and promote small-business development.

“ASA member firms support policies that make it easier for Main Street businesses to access the capital they need to grow the economy and spur job creation,” ASA CEO Chris Iacovella said in a statement. “The SEC’s failure to prioritize a capital formation agenda directly harms small businesses and entrepreneurs and decreases opportunities for investors.”

Scott’s bill would build on the JOBS Act and similar capital formation legislation that was approved during previous Republican Congresses.

If Republicans win the Senate in the 2024 election, Scott would be in line to chair the Senate Banking Committee. A former insurance sales professional, he’s currently running for the GOP presidential nomination.

Work on Scott’s pending legislation will begin soon.

“This is a legislative framework meant to start conversations as we put together bill text — the framework seeks to solicit feedback and input from both members and stakeholders, which will help inform the introduction of draft text and legislation down the line,” Watson said.