Time for Congress to Reform the SEC’s Outdated Accredited Investor Definition

Public policy isn’t just a framework for startups and investors, it’s a gatekeeper deciding who gets to play the game. And few policies are as restrictive as the Securities and Exchange Commission’s (SEC) definition of an “accredited investor.” This definition has long determined who can and cannot invest in private securities offerings (i.e. startups), not based on financial literacy, experience, or sophistication, but rather on wealth thresholds set decades ago.

The SEC’s framework for accredited investors is outdated, in a manner that contributes to assertions of discrimination, and actively harming the ability of startups to access early-stage capital. The 2025 Trump administration is clearing taking different approaches to financial regulations, but the real power to fix this issue lies with Congress.

What Is an Accredited Investor and Why Does It Matter?

An individual who meets one of the following financial criteria is considered accredited:

• Income: An individual must have earned at least $200,000 per year ($300,000 if combined with a spouse or spousal equivalent) in the previous two years, with the expectation of maintaining that level.
• Net Worth: Alternatively, an individual must have a net worth of at least $1 million, excluding the value of their primary residence.

These thresholds, established in the early 1980s, were designed to protect investors from financial ruin due to risky, illiquid investments — which, let’s be absolutely clear, investing in startups is exceptionally high risk, and most people should NOT. The mistake underlying that threshold though is that wealth equates to financial sophistication or understanding of startups — and let’s also be crystal clear, that’s just b.s. The implication: A fundamentally flawed system that limits investment opportunities to a small, likely inexperienced or actually unqualified class of individuals, disproportionately excluding minorities, rural investors, and those without generational wealth.

For decades, these financial thresholds have remained unchanged, despite inflation and the rapid expansion of financial literacy tools. If indexed for inflation, today’s accredited investor requirements would be closer to $3.5 million in net worth and $700,000 in annual income. Meanwhile, countless capable investors remain locked out, unable to support entrepreneurs and contribute to the startups that drive our economy.

The Impact of Restrictive Investment Rules on the U.S. Economy

Startups and small businesses are the backbone of the American economy. With over 35 million small businesses employing nearly 46% of the private-sector workforce, and startups the source of most job creation, early-stage capital is an essential economic engine (best left to the private sector and investors). However, a lack of investor diversity and access to funding networks remains one of the biggest barriers to capital for these businesses.

• Fewer than 19% of U.S. households qualify as accredited investors, meaning the vast majority of Americans are legally barred from funding startups.
• Only 1.3% of angel investors are Black, and 2.3% are Hispanic.
• Just 1.7% of VC-backed startups have a Black founder, and 1.3% have a Latino founder.

By restricting who can invest, the SEC is artificially suppressing the flow of capital that could be fueling new businesses, technological breakthroughs, and job creation. These regulations aren’t protecting investors — they’re harming economic growth and, frankly, restricting individual rights.

What’s worse? The SEC has been considering raising the financial thresholds, further reducing the number of people who qualify to invest. If enacted, this would mean fewer investors, fewer startups getting funded, and even greater economic inequality.

Since so Risky, should we Expand Investment Access for All??

The argument for reform is straightforward:

• Financial education and experience, not wealth, should determine investment eligibility. Wealth is not a proxy for sophistication. Millions of professionals — accountants, financial advisors, startup operators, startup development organization leaders, economists, and business owners — possess the expertise to evaluate investment risks yet remain excluded under the current definition.
• Cost-of-living differences distort the thresholds. High-income earners are concentrated in coastal cities, meaning investors in lower-cost regions (often in the Midwest and South) are disproportionately shut out. This creates a geographic imbalance in startup investment that disadvantages companies outside of major hubs; this is in part why, venture capital seems flusher from Silicon Valley and New York — not better startups, per se; simply the fact that the wealth able to invest is concentrated there, because of the higher cost of living.
• Congress has already shown bipartisan support for reform. Last session, multiple bills aimed at expanding accredited investor eligibility passed the House with broad support. With the 2025 administration likely to take a more deregulatory stance, now is the time for Congress to revisit and pass these reforms.
• Simple matter of individual rights. Particularly in the matter of startups, with which policy-makers and government employees are, pragmatically, among the least qualified to vet, we have here an circumstance of good intentions causing harm. A somewhat understandable goal of protecting people from investing in an asset class with a 90% likelihood of losing everything, results in inexperienced legislators preventing people from doing so simple because they aren’t wealthy enough. In the classic sense of Two Wrongs Don’t Make a Right, the limits here infringe upon an individual right that should be protected: the personal decision to do so.

A study in the Journal of Business Venturing found that diverse investor groups are more likely to fund diverse entrepreneurs, leading to greater innovation and stronger economic growth. Expanding the definition of an accredited investor isn’t just about fairness, it’s about economic competitiveness. The U.S. cannot afford to stifle capital access while other nations modernize their financial markets.

The Role of the 2025 Administration and the Call to Congress

The Trump administration has historically favored deregulation and economic expansion, meaning there is a real opportunity to push for SEC reforms that open private market investment to a broader swath of Americans. It could be again, but let’s be clear: this issue is not solely in the hands of the White House.

Congress must take legislative action to modernize the accredited investor definition. The SEC has had decades to fix this problem and has only inched toward minor reforms. Lawmakers must step up and mandate real change that reflects modern investing knowledge, not just outdated income brackets.

Call on Congress, particularly U.S. House Committee on Financial Services Chairman French Hill and Ranking Member Maxine Waters, and U.S. Senate Committee on Banking, Housing, and Urban Affairs Chairman Tim Scott and Ranking Member Elizabeth Warren to, at least:

1. Expand accreditation criteria beyond wealth thresholds. Allow financial education, industry certifications, and work experience to qualify investors.
2. Index financial thresholds to inflation. If wealth remains a factor, it should at least reflect economic reality.
3. Incorporate cost-of-living adjustments. Ensuring investors in lower-cost regions aren’t unfairly excluded.

Engine, a policy coalition that connects startups and government, has drafted a letter to Representatives (you can read it here), but better than that, they have a simple online form to fill out to get your signature behind it (do that here).

Later this month, policymakers from the House Financial Services Committee are expected to hold a hearing to consider proposals to improve capital access for startups. Expanding the accredited investor definition would allow greater participation in the startup ecosystem, giving more people the opportunity to invest in startups, and resulting in more startups receiving funding.

Originally published at https://seobrien.com on February 6, 2025.