[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                   SOPHISTICATION OR DISCRIMINATION?
                    HOW THE ``ACCREDITED INVESTOR''
                       DEFINITION UNFAIRLY LIMITS
                       INVESTMENT ACCESS FOR THE
                  NON-WEALTHY AND THE NEED FOR REFORM

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            FEBRUARY 8, 2023

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       Printed for the use of the Committee on Financial Services

                            Serial No. 118-3
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            
                            
                               __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-358 PDF                 WASHINGTON : 2023                    
          
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    Subcommittee on Capital Markets

                    ANN WAGNER, Missouri, Chairwoman

FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                DAVID SCOTT, Georgia
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
DAN MEUSER, Pennsylvania             SEAN CASTEN, Illinois
ANDREW GARBARINO, New York, Vice     WILEY NICKEL, North Carolina
    Chairman                         STEPHEN F. LYNCH, Massachusetts
MIKE LAWLER, New York                EMANUEL CLEAVER, Missouri
ZACH NUNN, Iowa
ERIN HOUCHIN, Indiana
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 8, 2023.............................................     1
Appendix:
    February 8, 2023.............................................    41

                               WITNESSES
                      Wednesday, February 8, 2023

Bell, Omi, CEO & Founder, Black Girl Ventures....................     5
Fletcher, Gina-Gail S., Professor of Law, Duke University School 
  of Law.........................................................    12
Olivencia, David, CEO, Angeles Investors.........................     7
Schulp, Jennifer J., Director, Financial Regulation Studies, 
  Center for Monetary and Financial Alternatives, Cato Institute.     9
Velasquez, Eli, Founder & Managing Partner, Investors of Color, 
  and Founder & CEO, Capital Stack Investers, testifying on 
  behalf of the Angel Capital Association........................    10

                                APPENDIX

Prepared statements:
    Bell, Omi....................................................    42
    Fletcher, Gina-Gail S........................................    44
    Olivencia, David.............................................    54
    Schulp, Jennifer J...........................................    56
    Velasquez, Eli...............................................    66

              Additional Material Submitted for the Record

Wagner, Hon. Ann:
    Written statement of the American Securities Association.....    71
    Written statement of GTS Asset Management....................    75
    Written statement of the Small Business Investor Alliance 
      (SBIA).....................................................   105
Hill, Hon. French:
    Written statement of RAVN....................................   107
    Written responses to questions for the record submitted to 
      Omi Bell...................................................   109
    U.S. Securities and Exchange Commission Office of the 
      Advocate for Small Business Capital Formation Annual Report 
      Fiscal Year 2022...........................................   112
Huizenga, Hon. Bill:
    Written statement of the U.S. Chamber of Commerce............   228
Waters, Hon. Maxine:
    Better Markets Fact Sheet....................................   231
    Letter from Case Western University School of Law, dated 
      February 7, 2023...........................................   233
    Written statement of Professor Elizabeth de Fontenay.........   242
    North American Securities Administrators Association (NASAA) 
      report entitled, ``Report and Recommendations for 
      Reinvigorating Our Capital Markets,'' dated February 7, 
      2023.......................................................   267
    Written statement of Public Citizen..........................   321

 
                   SOPHISTICATION OR DISCRIMINATION?
                    HOW THE ``ACCREDITED INVESTOR''
                       DEFINITION UNFAIRLY LIMITS
                       INVESTMENT ACCESS FOR THE
                  NON-WEALTHY AND THE NEED FOR REFORM

                              ----------                              


                      Wednesday, February 8, 2023

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2220, Rayburn House Office Building, Hon. Ann Wagner 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Wagner, Lucas, Sessions, 
Huizenga, Hill, Steil, Meuser, Garbarino, Lawler, Nunn, 
Houchin; Sherman, Meeks, Vargas, Gottheimer, Casten, Nickel, 
and Lynch.
    Ex officio present: Representative Waters.
    Chairwoman Wagner. Good morning. The Subcommittee on 
Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Sophistication or 
Discrimination? How the `Accredited Investor' Definition 
Unfairly Limits Investment Access for the Non-Wealthy and the 
Need for Reform.''
    Our ranking member is delayed, but_oh, you are here, Mr. 
Sherman. Wonderful.
    Welcome.
    Mr. Sherman. It's good to see you.
    Chairwoman Wagner. It's good to see you as well.
    I am now going to recognize myself for 5 minutes.
    Good morning, all, and welcome to the Capital Markets 
Subcommittee of the 118th Congress. And I want to thank you all 
for joining us for today's hearing.
    We are going to be discussing a topic that matters to 
millions of Americans: expanding how they are able to invest 
their hard-earned money for a better future.
    This hearing will examine the ways in which Congress can 
give Main Street investors better access to investment 
opportunities that have been historically available for only 
the wealthy or the highly-educated. Congress must work to 
expand opportunities for all investors and entrepreneurs in the 
securities markets in order to create long-term, sustainable 
growth within our economy.
    Companies have two options for accessing capital in the 
securities markets: an initial public offering; or a private 
offering. Due to the considerable costs associated with 
burdensome reporting requirements for public companies, an 
initial public offering may not be an option for many smaller 
companies. Therefore, a private offering is a more cost-
efficient way for a smaller company to raise capital.
    However, raising funds through a private offering has its 
own challenges, because the, ``accredited investor,'' 
definition uses wealth and other limited criteria to determine 
sophistication, which restricts the pool of potential 
investors, leaving many without access to funding.
    The gap between private and public offerings is 
substantial. From July 2021 to June 2022, the amount of capital 
raised with private offerings reached a staggering $4.5 
trillion, but during the same period, only $126 billion was 
raised in IPOs. To put this into context, that is only 3 
percent of what our private markets raised.
    This gap highlights the enormity of the investment 
opportunities within the private markets primarily accessible 
to only wealthy, accredited investors and rarely available to 
the retail investor.
    To increase investment opportunities for all Americans and 
help entrepreneurs raise more funds, we must broaden our pool 
of investors in our private markets.
    As SEC Commissioner Peirce noted, ``A person's economic 
status may demonstrate an ability to withstand losses, but it 
certainly does not demonstrate financial sophistication.'' The 
Commissioner continues, ``The result of pretending that wealth 
is a good measure of sophistication is a standard that 
discriminates against financially sophisticated lower-income 
and lower-net-worth Americans. These Americans cannot use their 
experience, their local knowledge, their education, and their 
investment acumen to build a balanced investment portfolio to 
maximize the nest eggs that they pass on to their children or 
to invest in their own communities.''
    To that, I say, ``Amen.''
    Congress must modernize the outdated, ``accredited 
investor,'' definition and expand the number of individuals who 
qualify as accredited investors to open up more funding 
opportunities for all entrepreneurs.
    Additionally, we must expand access to investment 
opportunities for retail investors through closed-end funds, 
whose shares trade on the open market and have some similar 
traits with ETFs and mutual funds. Approximately 3 million 
retail investors rely on closed-end funds as a source of 
retirement savings and investment opportunities, but the SEC 
currently limits their investment in private securities to just 
15 percent of the funds' net assets. We should allow public-
offered closed-end funds to invest all of their assets in 
private securities to increase retail investor exposure to 
private markets, while maintaining investor protection.
    Finally, we must provide equity compensation for gig 
workers, who now make up over a quarter of the U.S. workforce 
and play a vital role in our 21st-Century economy. These 
workers deserve the same opportunities for financial stability 
and growth as traditional employees.
    Expanding opportunities for all investors and entrepreneurs 
is not just a moral imperative but it is also essential for the 
growth and prosperity of our economy.
    I want to thank you all, and I look forward to our 
discussion of this critical issue.
    I now recognize the ranking member of the subcommittee, the 
gentleman from California, Mr. Sherman, for 5 minutes to give 
his opening remarks.
    Mr. Sherman. Thank you. I look forward to working with you, 
as we have worked for so many years on both the Financial 
Services and Foreign Affairs Committees.
    I look forward to the two hearings today, which are to some 
extent overlapping in their subject matter.
    I want to thank the following Democratic Members for 
serving on this subcommittee.
    We have the gentleman from New York, who is the Chair of 
the House Foreign Affairs Committee, and is in another room 
that I may have to run to, Mr. Meeks.
    We have Mr. Scott from Georgia, who is the ranking member 
on the House Agriculture Committee.
    We have Mr. Vargas from the great State of California; the 
gentleman from New Jersey, Mr. Gottheimer; the gentleman from 
Texas, Mr. Gonzalez; and the gentleman from Illinois, Mr. 
Casten, who was our Subcommittee Vice Chair last Congress; and 
the gentleman from Missouri, Mr. Cleaver, who is the ranking 
member on our Housing and Insurance Subcommittee. All of those 
Members are returning from last Congress.
    We also have Mr. Lynch, who served on this subcommittee 
previously; and Mr. Wiley Nickel, who is the only complete 
freshman who is joining us, and I am sure he will be here soon.
    The titles of the hearings that we are holding today imply 
that every investor protection is a barrier. And it is. It is a 
barrier to what might be a great investment. It is a barrier to 
what might be fraud or an ill-suited investment or just a bad 
deal.
    The fact is, we need the right blend of investor protection 
and securities regulation on the one hand, and access to 
capital and access to investments on the other. We should not 
always be saying that we go in one direction or the other.
    The proof that securities regulation is actually helpful to 
those trying to raise capital is illustrated by the fact that 
all over the world, people send their money to be invested in 
countries that have good securities protection, whether that be 
London, New York, or elsewhere.
    In the presence of good investor protection, you get more 
capital invested in the markets. So, investor protection not 
only protects investors, it is necessary for the business 
economy as a whole that is seeking investment.
    As to the topic of this hearing today, it focuses on the 
definition of, ``accredited investor,'' found in Regulation D 
and elsewhere. I am not here to defend it. We need a definition 
of a private placement that makes sense. And that doesn't mean 
it should be more restrictive or less restrictive than we have 
now, but it should be different.
    The chairwoman focuses on the, ``sophisticated investor,'' 
or ``accredited investor,'' definition and points out that if 
you win the lottery on Monday, that doesn't make you an 
investment genius on Tuesday just because you have a million 
dollars in the bank.
    Furthermore, the definition of a million dollars is a 1982 
definition. So, it was either wrong then or it is wrong now, 
but it is a completely different amount of money. And very few 
people are saying, ``Well, just index that for inflation and 
you've got a great regulation,'' because the fact is, as the 
chairwoman points out, that just because you are rich, that 
does not mean that you are in a good position to evaluate 
investments.
    But what we could do is change the definition of, 
``accredited investor,'' to the following standards: someone 
who is investing less than 5 percent of their net worth in a 
particular investment; and someone who, either by virtue of 
their own licenses and standards, is a sophisticated investor 
or someone whose advisor is sophisticated.
    But that advisor needs to be a fiduciary, truly 
independent, not receiving a commission, and not expecting to 
get referred business from the promoter. Because you can have 
an advisor who is sophisticated as hell; they are sophisticated 
in knowing who is paying their fee and who is referring them 
the next client. And if that is the promoter, I would rather 
have a dumb investment advisor who was loyal to me than a smart 
one who was loyal to someone else.
    So, I want to thank the gentlelady for holding this 
hearing, and make history in this subcommittee by yielding back 
almost 40 seconds.
    Chairwoman Wagner. Wow. Well done, to the ranking member. 
That is a first. See? Wonderful.
    Today, we are going to welcome the testimony, first, of Ms. 
Omi Bell, the CEO & founder of Black Girl Ventures. Black Girl 
Ventures is an organization here in D.C. that is focused on 
providing underserved female founders with access to community 
networks, capital, and capacity-building to develop and grow 
their businesses. Ms. Bell's organization has funded 264 women 
of color and served over 2,000 participants, who are 
collectively generating over $10 million in revenue and 
supporting 3,000 jobs.
    Next, we have Mr. David Olivencia, and he is the CEO and 
co-founder of Angeles Investors. Mr. Olivencia is an 
experienced angel investor and is active in the minority angel 
investor community. Formerly a managing director at Accenture, 
Mr. Olivencia recently assumed the CEO role at Angeles 
Investors, a Latino-focused angel group with nearly 200 
members. He is also a member of IrishAngels and serves as an 
advisor to Commune Angels. That is a lot of angels.
    Ms. Jennifer Schulp is the Director of financial regulation 
studies at the Center for Monetary and Financial Alternatives 
at the Cato Institute. There, she focuses on securities and 
capital markets regulation. Prior to joining Cato, Ms. Schulp 
was a Director in the Department of Enforcement at the 
Financial Industry Regulatory Authority (FINRA), representing 
FINRA in investments and disciplinary proceedings relating to 
violations of the Federal securities laws and self-regulatory 
organization rules.
    Next, we have Mr. Eli Velasquez, the founder and managing 
partner of Investors of Color. As managing partner, Mr. 
Velasquez works to close the funding gap in startup capital by 
facilitating syndicated investments in early-stage companies 
for underrepresented accredited investors. Investors of Color 
is composed of over 800 investors, representing the entire 
continuum of capital, including angel investors, ad hoc 
investment networks, venture capital, revenue-based investment 
firms, family offices, and other capital providers.
    And last, but not least, we have Ms. Gina-Gail Fletcher. 
Ms. Fletcher is a professor of law at Duke University School of 
Law, specializing in research on financial regulation and 
market manipulation. She was previously an associate with the 
law firm of Gibson Dunn.
    We want to thank each of you for taking the time to be here 
this morning. Each of you will be recognized for 5 minutes to 
give an oral presentation of your testimony. And without 
objection, each of your written statements will be made a part 
of the record.
    Ms. Bell, you are now recognized for 5 minutes to give your 
oral remarks.

   STATEMENT OF OMI BELL, CEO & FOUNDER, BLACK GIRL VENTURES

    Ms. Bell. Thank you. Good morning, Subcommittee Chairwoman 
Wagner, Ranking Member Sherman, Chairman McHenry, Ranking 
Member Waters, and esteemed members of the Subcommittee on 
Capital Markets. It is an honor to speak with you today about 
the importance of access to financial education and opportunity 
through investment.
    My name is Shelly Omilade Bell--please call me, ``Omi''--
and I am the CEO and founder of Black Girl Ventures. We are a 
nonprofit organization that provides access to capital, 
capacity, and community to Black and Brown women founders.
    And a quick update, to date, Black Girl Ventures has funded 
450 Black- and Brown-woman-owned businesses across 15 cities. 
Our founders represent $10 million in revenue for the U.S. 
economy and 3,000 jobs.
    I founded Black Girl Ventures after a wide-ranging career 
path. I am a graduate of an Historically Black College and 
University (HBCU), a computer scientist, and a serial 
entrepreneur. I have worked in workforce development for the 
U.S. Patent and Trademark Office, as a teacher, and as a 
performance poet.
    And in every role, at every milestone of life, I have both 
experienced personally and witnessed in communities I serve how 
systemic barriers to financial education prevent middle-class, 
low-income, and especially Black and Brown people from gaining 
economic mobility and building wealth.
    Entrepreneurship was my pathway out of poverty. As a single 
mother who had just had her second child, I found myself on 
public assistance, despite holding a full-time job as a teacher 
and having a degree in computer science, because as almost 12 
percent of Americans know well, holding a traditional full-time 
job was not enough to provide financial security for my family.
    In 2015, I launched a custom merchandise print shop that 
was profitable enough to deliver my family and I out of public 
assistance and into a six-figure income. My mom invested her 
retirement money of $10,000 into my print shop, and if she had 
not, I would likely still be receiving public assistance.
    Due to systemic barriers, most founders in the Black 
community do not get a friends-and-family round to seed their 
businesses, and investment opportunities to scale businesses 
are even further out of reach.
    In 2016, I read a report that Black women in the U.S. were 
starting businesses at 6 times the national average, yet 
receiving less than 1 percent of venture capital. And in 2023, 
that has not changed.
    I launched Black Girl Ventures from a living room in 
southeast D.C. with this statistic in mind and history as the 
inspiration. In the early 1900s, during the Harlem Renaissance, 
when White landowners raised rents, Black tenants would throw 
parties for an admission fee that would be used to pay their 
rent. I used the same model to build Black Girl Ventures and 
essentially built the largest rent party for entrepreneurs on 
the East Coast. Black Girl Ventures is the family-and-friends 
round for Black- and Brown-woman founders.
    Over the course of the last 7 years, I have read and 
reviewed over 1,000 applications for pitching for funding. And 
I have trained over 5,000 people in marketing, business 
development, and fundraising. As a result, my organization has 
provided over $3 million in funding to early-stage businesses 
that have gone on to hire employees and gain shelf space in the 
largest retailers in the country.
    And yet, even after all of my professional experiences and 
the life experience of managing a household, raising two 
children, and becoming financially sufficient via 
entrepreneurship, under the current definition of, ``accredited 
investor,'' I was deemed not sophisticated enough. This means I 
was shut out of investing in the businesses I believed in 
before anyone else did, while investors who were already 
wealthy stood to benefit.
    The SEC last updated its definition in 2020 in an attempt 
to address diversity and equity concerns, but the addition of 
credentials and certification requirements neglect equally-
relevant markers of financial sophistication.
    Black and Brown people, low-income people, and middle-class 
people are standing in the back of a proverbial line ordered by 
race, generational wealth, and access to resources. Every time 
you feel like you have gotten closer, the rules change to help 
or protect those at the front of the line.
    The lack of access to even the systems that aren't perfect 
should still be considered a diversity and equity issue. If 
diversity is good for investment, diversity is also good for 
investors.
    I am not an advocate for deregulation, but for education 
and increased access to financial education and investing. 
Reviewing the definition of, ``accredited investor,'' must 
involve striking the right balance between protecting investors 
and the public interest while increasing access and investment 
opportunities for historically-excluded communities.
    It is a step in the right direction to have such an 
esteemed panel today to share expertise and to further the 
efforts of building an economy where all people can have 
equitable access to pathways to create wealth.
    I am grateful for the subcommittee's attention to this 
issue, and I look forward to working with you as our 
conversations continue, because, quite frankly, change can't 
come soon enough for the founders we serve at Black Girl 
Ventures and thousands of Black and Brown business owners 
across the country.
    Thank you.
    [The prepared statement of Ms. Bell can be found on page 42 
of the appendix.]
    Chairwoman Wagner. Thank you. Thank you, Ms. Bell, and 
congratulations to you.
    Ms. Bell. Thank you.
    Chairwoman Wagner. Mr. Olivencia, you are now recognized 
for 5 minutes to present your oral testimony.

      STATEMENT OF DAVID OLIVENCIA, CEO, ANGELES INVESTORS

    Mr. Olivencia. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, and distinguished members of the Subcommittee on 
Capital Markets.
    My name is David Olivencia. I am a senior technology 
executive, early-stage investor, co-founder of national 
leadership organizations, and currently, the CEO of Angeles 
Investors.
    As CEO of Angeles Investors, I have the honor to represent 
and serve close to 200 national members and amazing partners 
with a mission to find, fund, and grow the most promising 
Hispanic and Latinx ventures.
    In addition to my role at Angeles Investors, I serve on the 
board of Notre Dame-affiliated IrishAngels, and am board 
advisor to Detroit-based Commune Angels, which has a focus on 
diversity and expanding access to angel investing.
    My life and career journey as well as my success in early-
stage investing was not easy and could only have happened in 
America.
    My parents and grandparents came to the southeast side of 
Chicago in the late 1940s from Puerto Rico. They had minimal to 
zero resources--and more like zero. My grandmothers were cooks 
in a Puerto Rican restaurant. My father dropped out of high 
school to support my grandmother and later earned his GED in 
the Army. So, I have a strong affiliation for our Armed 
Services.
    I was the first in my extended family to graduate from 
college and went on to pursue a successful career in the 
rapidly-growing technology industry. In my career, I saw the 
amazing impact that technology was having on the world.
    While earning my MBA at Notre Dame, I learned about 
startups and how they were leveraging technology to scale. I 
also learned about early-stage investments, which were largely 
a secret space or a club in which the wealthy were investing.
    There were amazing companies like Google, Amazon, YouTube, 
Uber, and others that were leveraging technology to grow 
rapidly. Early investors in these companies were making 
outsized returns and reinvesting those returns in the next set 
of successful startups.
    Like those early-stage investors, I wanted to get involved. 
Although I had carefully studied this asset class while earning 
my MBA from a top school, I sadly could not participate because 
I did not meet the income or net-worth requirements to qualify 
as an accredited investor. I also, unfortunately, did not have 
any inherited family wealth.
    A few years after I graduated, I qualified as an accredited 
investor and joined IrishAngels, where I began my angel-
investing journey. I have since built a portfolio of 
approximately 70 companies.
    But as I learned more about the angel-investing industry, I 
saw very few Hispanic, Black, or female investors who were 
investing alongside me. Furthermore, I learned that less than 2 
percent of the venture funds went to Hispanic founders, despite 
the fact that roughly 20 to 30 percent of the U.S. population 
is Hispanic, and that this community contributes about $3 
trillion to our U.S. GDP, and that also, our community is a 
major funder of the pension funds that fund these venture 
capital firms. Women and Black startup founders also receive 
only about 2 percent of all venture funding.
    Rather than complaining about the issue, in 2020 I joined 
forces with visionary leaders, co-founders, and founding 
members to create and build Angeles Investors. At Angeles 
Investors, we are one of the largest and fastest-growing angel 
groups in the world. In partnership with the Angel Capital 
Association and others, we provide training and education to 
enable our members and investors to learn more about this asset 
class and better evaluate startup companies.
    I often hear from non-accredited leaders in our community 
who express a desire to invest in companies that we invest in, 
but cannot due to the accredited investor standard.
    To emphasize my point, I will tell a true story about 
Carlos, a young professional from southern California who 
earned an MBA from a leading university.
    As Angeles was preparing to invest in the seed round of 
Canela Media, he approached me and passionately asked if he 
could invest. I asked him if he was qualified as an accredited 
investor, and he sadly said, ``No.'' He asked, ``Is there 
another way that I can invest? I really believe in the company, 
and the CEO. I understand their business model through my MBA 
studies.'' And I said, ``Sadly, you can't.''
    In the time since our investment, Canela Media's revenue 
has grown substantially, and now they employ more than 100 
employees, they have received numerous rewards, and its CEO was 
recently recognized as the Ernst & Young Entrepreneur of the 
Year.
    Every time I see another award or growth milestone for 
Canela Media, I scratch my head and ask why Carlos was not able 
to invest in this great company.
    I am committed to working with others to improve the 
accredited investor definition and increase investment access 
for a wider range of potential investors. I look forward to 
partnering with each of you for reforms that allow thousands of 
younger versions of Carlos and myself to participate in this 
asset class.
    Thank you.
    [The prepared statement of Mr. Olivencia can be found on 
page 54 of the appendix.]
    Chairwoman Wagner. Thank you, Mr. Olivencia. And 
congratulations and kudos to you also.
    Ms. Schulp, you are now recognized for 5 minutes to give 
your oral testimony.

 STATEMENT OF JENNIFER SCHULP, DIRECTOR, FINANCIAL REGULATION 
 STUDIES, CENTER FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO 
                           INSTITUTE

    Ms. Schulp. Chairwoman Wagner, Ranking Member Sherman, and 
distinguished members of the Subcommittee on Capital Markets, 
my name is Jennifer Schulp, and I am the director of financial 
regulation studies at the Cato Institute's Center for Monetary 
and Financial Alternatives. Thank you for the opportunity to 
take part in today's hearing.
    Private securities offerings are diverse and include direct 
investment in individual companies as well as pooled investment 
into private equity, hedge, or other funds. Such offerings, 
which represent a large portion of the capital raised in U.S. 
markets, are often made pursuant to exemptions provided in Rule 
506 of the SEC's Regulation D.
    Almost twice as much money was raised under Rule 506(b) 
than by all registered offerings between July 1, 2021, and June 
30, 2022. And offerings under Rule 506(c), a less popular 
exemption, raised more money than was raised in IPOs.
    But whether a person is eligible to invest in a Rule 506 
offering is largely determined by whether he or she meets the 
definition of an accredited investor. Under SEC rules, an 
accredited investor is a natural person with a net worth that 
exceeds $1 million, not including their primary residence, or 
an annual income of at least $200,000, or $300,000 with a 
spouse.
    To put this into perspective, the SEC estimates that about 
13 percent of U.S. households qualify as accredited investors. 
Thus, approximately 90 percent of American households are 
unable to participate in the segment of capital raising that 
dwarfs the investing opportunities available in public markets.
    This alone should raise a red flag as to the wisdom of the 
accredited investor definition, but the problems with the 
definition go beyond this simple fact. Most fundamentally, the 
accredited investor definition is objectionable because it 
gives the SEC the authority to limit how people can invest 
their own money.
    But even when judged by its own goal of limiting private 
offerings to investors with sufficient financial 
sophistication, the accredited investor definition is 
ineffective. Being wealthy is no proxy for financial 
sophistication.
    This line-drawing lumps the elderly with substantial 
retirement savings and lottery winners with windfall profits in 
with people whose earnings have depended on some financial 
know-how. It also excludes those who do not have a substantial 
nest egg but have a great deal of general investment knowledge 
or have experience with the industry in which they seek to 
invest.
    A generic wealth test is also a poor fit if the goal is to 
limit access to private investments to only those who can 
afford to take the loss. Loss tolerance rests on more than a 
naive wealth determination. For example, older investors may be 
more sensitive to loss than younger investors, who have a 
longer investing time horizon.
    The truth is that no simple blanket rule can capture 
individual investor sophistication.
    This mismatch between bright-line wealth tests and investor 
sophistication, however, is not just a theoretical concern. By 
excluding middle- and lower-income individuals from many of the 
offerings in the market, the current regulatory regime limits 
their ability to amass wealth, diversify holdings, and hedge 
certain risks.
    There are fewer public companies today than there were 20 
years ago, and companies tend to be more mature when they go 
public. This means that many companies are past their high-
growth phase by the time most people can invest in them.
    In short, people have fewer choices in the public markets, 
and what choices they have may offer lower potential returns 
and fewer opportunities for diversification.
    Moreover, by reserving private market opportunities for the 
already-wealthy, the accredited investor definition reinforces 
wealth gaps that exist in American society. Those who qualify 
as accredited investors are disproportionately White and 
concentrated on the country's high-income coasts. This unequal 
impact on less-wealthy groups also harms entrepreneurs who look 
to their own communities to furnish needed capital.
    Breaking down society's wealth divide requires removing 
barriers to opportunities for investors and entrepreneurs to 
make financial gains. The accredited investor definition should 
be reformed, at a minimum, to allow more investors the 
opportunities afforded by private offerings.
    Thank you, and I welcome any questions that you may have.
    [The prepared statement of Ms. Schulp can be found on page 
56 of the appendix.]
    Chairwoman Wagner. Thank you for your testimony, Ms. 
Schulp.
    Mr. Velasquez, you are recognized for 5 minutes to give 
your testimony.

    STATEMENT OF ELI VELASQUEZ, FOUNDER & MANAGING PARTNER, 
INVESTORS OF COLOR, AND FOUNDER & CEO, CAPITAL STACK INVESTERS, 
  TESTIFYING ON BEHALF OF THE ANGEL CAPITAL ASSOCIATION (ACA)

    Mr. Velasquez. Thank you, Chairwoman Wagner, Ranking Member 
Sherman, and distinguished members of the committee. Thank you 
for the opportunity to testify this morning.
    My name is Eli Velasquez, and I appear today on behalf of 
the Angel Capital Association (ACA), where I serve on the board 
of directors.
    ACA is a professional society of angel investors in the 
U.S. representing more than 16,000 members encompassing all 
parts of the early-stage entrepreneurship ecosystem, from 
individuals and family offices to angel funds. ACA offers 
education and collaboration to its members in all 50 States, 
sharing best practices in early-stage investing.
    Accredited angel investors are the wellspring of early-
stage capital in so many small and midsize communities. We take 
seriously this responsibility of helping to build and educate 
the next generation of investors and entrepreneurs, with a 
focus on diversity, equity, and inclusion.
    Because of this, ACA has been leading efforts to educate 
minority entrepreneurs on how to engage with angel investors 
and raise early-stage capital, as well as efforts to diversify 
our investor base.
    The work of this committee to improve opportunities for a 
more diverse groups of investors and entrepreneurs will be 
critical. ACA, as an organization, welcomes the opportunity to 
share our expertise and feedback in this effort.
    My own professional journey illustrates the importance of 
reducing barriers to entry for becoming an accredited investor. 
My written statement describes this in more detail, but I began 
as an engineer, working on the Delta rockets for Boeing. I 
earned a law degree at night while working full time, and along 
the way, moved over to Boeing's intellectual property business 
unit.
    It was there that I first heard the term, ``angel 
investor,'' from a wealthy friend, who described the wealth and 
income requirements to become an angel, and it sounded 
completely unattainable.
    After graduating from law school, I returned to my hometown 
of El Paso, where I co-founded the BiNational Sustainability 
Laboratory, a technology incubator that aimed to commercialize 
technologies on both sides of the U.S.-Mexico border. With 
funding from public and private partners in both the U.S. and 
Mexico, I worked with more than 200 early-stage companies, 
investors, and partners to support the commercialization of 
technologies from universities, labs, and local inventors.
    From there, I led the El Paso and West Texas Regional 
Centers for Innovation and Commercialization, where I helped to 
vet deals and research opportunities across 93 counties for 
funding from the $200 million Texas Emerging Technology Fund.
    I also started to support the management of the Camino Real 
Angels, an El Paso-based angel-investor group whose members 
were all older White males, despite El Paso's population being 
more than 80 percent Hispanic. I was doing the work of 
evaluating hundreds of investment opportunities but could only 
pass that information along, with no opportunity to 
participate.
    In 2015, I co-founded the Lubbock Angel Network, a 
coordinated effort amongst the university, local economic 
development, and the State that has now invested over $5 
million across 30 companies with a handful of exits.
    But still I could not participate, despite being more 
financially secure and only about $20,000 from the accredited 
investor income threshold. In contrast, one member of the 
Lubbock Angel Network was a 10-something professional, brand 
new to angel investing, who leveraged his family's trust to 
achieve the accredited investor status.
    It was not until 2020, when I was working with a nonprofit 
organization to design and deploy the U.S. State Department 
GIST Investors program, that I was finally able to write my 
first check as an accredited investor. After 22 years as a 
rocket scientist, IP expert, nonprofit founder, university 
executive, and founder of angel groups all over the world, I 
was finally able to write a check.
    My work with the GIST Investors program showed me how 
communities in the Middle East, Latin America, and Southeast 
Asia have developed inclusive approaches to get as many 
investors as possible trained and engaged in angel investing.
    This inspired me to found Investors of Color in the U.S. 
with my business partner, who serves as CEO of BLCK VC. 
Investors of Color is a national network of diverse accredited 
investors across the capital stack committed to building wealth 
for and by underrepresented communities.
    What I have learned through my own experience and in 
founding Investors of Color is that in order to mobilize more 
capital and engage more underrepresented individuals in angel 
investing, we need to reduce barriers to entry for becoming an 
accredited investor.
    The ACA has identified policy changes that can help 
increase the number of accredited investors. We ask that 
Congress, one, amend the definition of accredited investor to 
include certain licenses or qualifying education or experience; 
two, formalize investor education by directing the SEC to 
create an examination for accredited investors; three, require 
additional certifications, including reassessment, every 5 
years; four, require the SEC to allow self-certification; and 
five, implement investment safeguards.
    We also urge you not to increase the current minimum income 
threshold for investor accreditation. And we recommend that you 
require membership in a professional organization such as the 
Angel Capital Association or the National Venture Capital 
Association.
    As I said, my fellow members of the ACA and I are eager to 
serve as resources and feedback as you pursue legislative 
solutions to make capital more readily available to our 
nation's entrepreneurs, particularly in communities that are 
currently underserved.
    Thank you.
    [The prepared statement of Mr. Velasquez can be found on 
page 66 of the appendix.]
    Chairwoman Wagner. Thank you for your testimony, Mr. 
Velasquez.
    And we now turn to Professor Gina-Gail Fletcher. My 
apologies for leaving that title off of your name. You have 
more than earned it.
    So, Professor Fletcher, you are now recognized for 5 
minutes to give your testimony.

  STATEMENT OF GINA-GAIL S. FLETCHER, PROFESSOR OF LAW, DUKE 
                    UNIVERSITY SCHOOL OF LAW

    Ms. Fletcher. Thank you, Chairwoman Wagner.
    Chairwoman Wagner, Ranking Member Sherman, and esteemed 
members of the subcommittee, thank you so much for your 
invitation to speak with you today.
    I am a professor at Duke University School of Law, where I 
study and teach complex financial instruments and market 
regulation.
    I am also a member of the board of the Healthy Markets 
Association, an investor trade group that focuses on market 
efficiency and fairness, as well as a member of the SEC's 
Investor Advisory Committee, where we are scheduled to actually 
have a meeting on these issues in just a few weeks.
    Now, while I appreciate the opportunity to speak with you 
this morning, I do question the premise of this hearing.
    The expansion of the private markets puts investors and our 
economy at risk. No amount of wealth or sophistication is a 
substitute for robust securities laws which ensure that all 
investors, not just the wealthy or connected, get the 
information they need to make informed investment decisions.
    Some have suggested that limiting private offerings to 
accredited investors somehow discriminates against those who do 
not meet the definition. Some have also argued that the SEC 
should allow companies, funds, brokers, and others to offer and 
sell private-market securities to retail investors--all of 
this, of course, in the name of investor choice and capital 
formation.
    This is perverse logic, at best.
    The public markets are where all investors are generally 
treated fairly and equally, regardless of wealth, 
sophistication, or connections. The private markets are the 
very opposite of that.
    Expanding the definition of an accredited investor is not 
going to result in more investors becoming millionaires. 
Rather, it would expand the opportunities for wealth extraction 
and amplify wealth inequality.
    When Congress passed the Federal securities laws, it 
determined that if companies want to raise money from the 
public, they have to provide the public--which includes 
investors of all levels of sophistication and wealth--basic 
financial, governance, and operational information.
    Contrary to much of the rhetoric that we hear today, the 
requirement that companies make basic disclosures is about 
protecting and promoting capitalism, not just protecting small 
investors.
    Unfortunately, this essential bargain between information 
and capital formation has been destroyed by decades of 
deregulation.
    Approximately 40 years ago, the SEC permitted companies to 
offer and sell securities without registering with the agency 
if the investors were wealthy enough. The underlying 
presumption was that these investors, the wealthy and the 
connected, do not need the protection of the Federal securities 
laws because of their wealth and sophistication. Time and 
experience have consistently demonstrated that this assumption 
is misguided.
    There are several reasons why allowing retail investors 
access to private offerings would be deeply problematic both 
for retail investors and our markets overall, but I do wish to 
highlight a few this morning.
    First, retail investors will generally not be provided with 
sufficiently comprehensive, reliable, and comparable 
information so as to make an informed investment decision. They 
would be dependent upon the willingness of the company or 
private fund to provide it. No amount of education will change 
the lack of information that is innate in the private markets.
    Second, while institutional investors might be able to 
adjust if they can't get their money back, retail investors 
generally cannot do so. Retail investors that are invested in 
stocks, bonds, options, and mutual funds can generally sell 
their investments nearly instantly. In the private markets, 
retail investors may not be able to sell at all.
    Third, in the public markets, you can easily determine the 
value of what you own by simply looking it up on the internet, 
looking at the NYSC or the NASDAQ. With private-market 
investments, valuations, such as those in venture capital and 
private equity funds, are often just what a few connected and 
often conflicted insiders say they are. As illustrated by the 
now-bankrupt FTX's valuation going from $8 billion to $18 
billion to $32 billion over less than 2 years, these valuations 
are often unsupported.
    Fourth, retail investors simply are not going to get the 
promising opportunities. Private companies will go to 
institutional investors first, because it is cheaper and easier 
to administer. So, private companies and funds that solicit 
capital from retail investors will disproportionately be those 
that are unable to obtain financing from institutional 
investors.
    Fifth, and finally, private-market investors face greater 
fraud risks than in the public market, and retail investors, as 
State securities regulators can attest, may have little to no 
recourse.
    I urge you not to further expand the private markets, and 
condition all exemptions upon the timely provision of essential 
information to all investors.
    I look forward to our discussion this morning and to your 
questions. Thank you.
    [The prepared statement of Professor Fletcher can be found 
on page 44 of the appendix.]
    Chairwoman Wagner. Thank you, Professor Fletcher.
    We will now move from our witnesses to Member questioning, 
and I will recognize myself for 5 minutes.
    Mr. Velasquez, it is no secret that SEC Chairman Gary 
Gensler's agenda includes sweeping new regulations in our 
private markets that would create barriers for investors and 
entrepreneurs to participate in those markets. According to the 
SEC's rulemaking agenda, Chairman Gensler intends to amend the 
accredited investor definition by increasing the annual-income 
and net-worth thresholds.
    Accredited investors are a vital source, as we have heard 
here from the testimony, of capital for small businesses and 
communities across the country, and changes that would shrink 
the pool of accredited investors would have a detrimental 
effect on capital formation.
    Can you please discuss, sir, the impact of raising the 
financial thresholds in the accredited investor definition and 
what that would mean for investors and businesses seeking to 
raise capital in our private markets?
    Mr. Velasquez. Chairwoman Wagner, thank you for the 
question. This is one of the fundamental issues that we have 
with the rule as written.
    The income requirements were written back in, what, 1980, 
1982, probably randomly, right? Kind of, put a finger to the 
wind and let's pick some income thresholds.
    The ACA has conducted an analysis: 16,000 accredited 
investors make up the organization, which is the world's 
largest association of accredited investors. If those income 
thresholds go up, we would lose anywhere between 60 to 70 
percent of our members.
    That means Kansas City, Houston, Boise--this is where 
angels live--Lubbock, Texas; Claycomo, Missouri. This is where 
the angel community is activated and mobilizing capital.
    Now, when you look at the membership of the organization, 
it is predominantly male and White. Over time, it has changed 
to include more women, but we still lack the diverse 
membership. We are at about 5 percent, at most, between Black 
and Brown investors combined, of the organization. That means 
that you would absolutely decimate--decimate--the investor 
class for Black and Brown investors that is forming in Atlanta, 
Miami, Baltimore, and Chicago. This would absolutely annihilate 
Angeles Investors.
    So, if you increase that threshold, what you are 
effectively doing is telling not only the current investors 
that are there but any future ones, this is a completely 
unattainable--
    Chairwoman Wagner. Thank you, Mr. Velasquez.
    Ms. Schulp, closed-end funds are strictly-regulated and 
professionally-managed investment vehicles that can invest in 
private markets that many retail investors currently can't 
access. However, the SEC's limitations on a closed-end fund's 
investment in private funds are so stringent that they 
effectively deny retail investors access to private markets.
    Can you discuss some of the investor protection mechanisms 
in place for closed-end funds?
    And, based on your experience, would allowing closed-end 
funds to invest more than 15 percent of their assets in private 
securities increase retail investor exposure to our private 
markets while maintaining investor protections?
    Ms. Schulp. Thank you.
    Closed-end funds are regulated under the Investment Company 
Act and are run by registered investment advisors, subject to 
the host of many, many regulations around both their public 
access to the markets as well as the managerial 
responsibilities of the managers of those funds. Those should 
be sufficient and are very important in maintaining access to 
the public markets.
    Allowing additional access to private equity in such 
closed-end funds makes a lot of sense, because you have 
additional layers of protection that you do not have in some of 
the private equity funds or other funds that are offered 
through the exemption process.
    Investors, public investors, your standard retail 
investors, should have the opportunity to have more access, not 
15 percent in a closed-end fund--
    Chairwoman Wagner. Absolutely.
    Ms. Schulp.--not trying to invest in a company that does 
public equity investments as an indirect way to access that 
type of exposure. I think it makes a lot of sense to allow 
more--
    Chairwoman Wagner. Thank you.
    And let me move quickly, Ms. Schulp, to gig workers. As I 
said, they make up a quarter of our U.S. workforce.
    Do you think they should have access to equity compensation 
so they can participate in the growth of companies that they 
help make successful?
    Ms. Schulp. I do. I would say, to the extent that gig 
workers are making up more and more of our workforce, they 
should have the same opportunities here as regular, salaried 
workers do.
    Chairwoman Wagner. Absolutely. Thank you.
    Next, we shall move on to, at the ranking member's request, 
the gentleman from California, Mr. Vargas, who is now 
recognized for 5 minutes.
    Mr. Vargas. Thank you very much.
    First of all, I would like to say how pleased I am that we 
have a wonderful Chair. I don't want to ruin your reputation, 
but I appreciate all of the kindnesses you have shown me and 
others through the years, and it is great to see you there. 
Congratulations.
    Chairwoman Wagner. Thank you.
    Mr. Vargas. Again, I want to thank you for holding this 
hearing.
    And I want to thank all of the witnesses here.
    Obviously, there is a difference of opinion among our 
witnesses today, and, certainly, I think my opinion falls more 
in line with Professor Fletcher's opinion.
    Professor Fletcher, I think you said it well, that we have 
to look at transparency and protection. And, certainly, your 
view of the public markets versus the private markets is rather 
stark.
    Could you comment a little bit more on that?
    Because I think it is important to get that definition out, 
where the protections lie and where the protections don't. I 
think, to be fair to the other side, they are saying that a lot 
of the opportunities are on the private side, and people do not 
get that opportunity unless they are an accredited investor.
    I looked up the rule, Rule 501 of Regulation D, and it 
turns out, of course, that other nations have accredited 
investors also. We are not the only nation that has accredited 
investors. There are definitions, and the definitions lie all 
over the place. New Zealand has one; Canada; the EU.
    But, anyway, I would ask, first, you, Professor Fletcher, 
about the protections that they have or don't have.
    Ms. Fletcher. Thank you so much, Congressman.
    Just to start, one of the starkest distinctions between the 
private and the public market is the lack of information. 
Within the public markets, with public offerings, you have to 
do quite a bit of disclosure. You have to provide basic audited 
financial statements, and you have to make periodic 
disclosures. Within the private markets, there are no such 
obligations to provide information to your investors, no matter 
how large the offering, provided that the offering is only made 
to accredited investors.
    This has a few follow-on consequences. One is the inability 
to value these investments fairly or accurately, because we 
have to depend on insiders' valuations, because we can't just 
look them up, nor are they providing us with the information to 
be able to make these valuations.
    The second problem that arises is a lack of liquidity 
within the private markets. If someone can't value what they 
own, then it is harder to sell it to someone else, because how 
else are we going to know what that is worth?
    And this lack of liquidity might be okay for some 
institutional investors, but we have to think about average 
retail investors who might have, say, a medical emergency or 
might face some other need for their capital or some return on 
their investment and they are not able to get their money out 
of that investment. And we see that time and time again in the 
private markets.
    Mr. Vargas. Not to be the devil's advocate here, but we 
still have all of the fraud statutes, and there are, of course, 
very active bars that do take on these corporations that commit 
fraud. Isn't there some protection there, by being able to sue?
    Ms. Fletcher. Unfortunately, Congressman, the fraud 
protections in the private market are significantly weaker than 
the fraud protections that we have in the public market.
    Part of this goes to, again, this lack of information that 
we have, because we kind of just don't know. And it also goes 
to the fact that the way in which you can be held liable for 
fraud in the private market differs significantly from what we 
have in the public markets.
    Mr. Vargas. Okay.
    I do want to give the other side an opportunity to answer 
that question, the same question on the protections. Would 
anyone like to take a shot?
    Go ahead, Mr. Velasquez.
    Mr. Velasquez. Over the last 40 years, the angel activity 
has become more professionalized, thanks in large part to 
organizations like the ACA. So, in evaluating private 
opportunities, it is a pretty rigorous process. You go from 
screening to presentations to due diligence.
    And the interesting thing about doing this as an angel is 
that you are doing it in a group. You are doing it in a group 
with other folks who have a vested interest in ensuring that 
opportunity is as vetted as possible. Why? Because you want to 
do good deals, and you don't want to pass along bad deals. You 
don't want to be known as the organization sharing bad deals. 
So, you are known for doing rigor and doing due diligence on 
those companies. You request that information as part of the 
process.
    Now, in the ACA, we have evaluated thousands and thousands 
of deals. We have looked at--we have talked to--surveyed the 
angel groups, surveyed the members. We don't find fraud. We 
find bad deals that fail, and it is a high-risk asset class.
    And that needs to be addressed, that when you are going to 
be involved in this asset class, it is high-risk with a 
potential high upside, so, as you embark on this, be aware of 
these red flags that could lead you in the wrong direction.
    But as far as fraud, we don't see fraud. We see bad deals.
    Mr. Vargas. Thank you.
    My time is up. Thank you, Madam Chairwoman.
    Chairwoman Wagner. Thank you.
    The gentleman from Michigan, Mr. Huizenga, who is also the 
Chair of our Subcommittee on Oversight and Investigations, is 
now recognized for 5 minutes.
    Mr. Huizenga. Thank you, Madam Chairwoman. And I might 
note, congratulations. This is the subcommittee that I was the 
former ranking member and chairman of, and I see the glee in my 
colleagues' eyes that you are now Chair rather than me.
    Chairwoman Wagner. No glee.
    Mr. Huizenga. No glee.
    Madam Chairwoman, I request unanimous consent to enter into 
the record a letter from the U.S. Chamber of Commerce on this 
issue.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Huizenga. Thank you.
    And I have to thank the witnesses for being here. You are 
the voices and the faces and the stories that many of us on 
this side of the aisle have been talking about for years, who 
have been dismissed by those on the other side, and certainly 
by the Chair of the SEC.
    The professor wants to talk about the SEC, and I believe in 
her written statement she says, ``Allowing retail investors to 
access the private markets simply increases the likelihood that 
everyday investors will be worse off from investing in 
unproven, opaque investments with limited liquidity and no 
information to value their investments.''
    I might add, Professor, that if Chair Gensler has his way, 
it is going to be even more expensive for retail investors to 
invest. And, frankly, it simply sounds like you would rather 
ban private markets than anything else.
    So, I am going to turn to my friend, David Olivencia. 
Actually, David and I have known each other going back to my 
time when I was in the State legislature. We have lost contact 
over a number of years. So, he will take this question in the 
spirit in which I am asking it.
    David, are you a sucker? Are you smart enough to really do 
this, even when you weren't a qualified investor?
    Mr. Olivencia. I am not a sucker, Congressman.
    Mr. Huizenga. That I know. And I can guarantee you that Ms. 
Bell isn't a sucker, and Mr. Velasquez, same thing. You are the 
stories that have made America what it is, this entrepreneurial 
juggernaut that we are.
    And I just about said something that would have been 
bleeped--I don't care what other countries' qualified 
investors' thresholds are; I care about U.S. thresholds.
    Ms. Schulp, one of the things that you did say is that, if 
you look, the wealthy coasts dominate this. And those of us 
from flyover country, guess what_$175,000 in Kalamazoo, 
Michigan, or El Paso or down in Ohio or even at Notre Dame at 
South Bend, is very different than $175,000 in New York City or 
in L.A., and the fact that the government can't recognize that 
is just baffling. And this discussion of increasing it is just 
ludicrous.
    Last Congress, I introduced the Accredited Investor 
Definition Review Act, which, among other things, would require 
the SEC to review a list of qualifications, designations, and 
credentials for individuals to qualify as a qualified investor. 
And that is the direction we need to go.
    Mr. Velasquez, I really appreciate your very helpful 
enumerated ways that we can move forward on this.
    I want to get a little reaction, and I will start with you, 
Ms. Bell.
    You have heard a very academic view of how people are going 
to be disadvantaged, and I am curious if you could respond to 
the statement that this is going to amplify wealth inequity and 
that this is a greater fraud risk.
    Do you think this is going to amplify wealth inequity?
    Ms. Bell. I think it is going to provide more opportunities 
for wealth.
    When I think about the founders that we serve_I will give 
you an example of a story. Yesterday, I met a woman named Isa 
Watson, and she is the founder of Squad. And she talked about 
how she thought she matched the pattern. She graduated from 
MIT. She is a data scientist. But as she went out to raise 
capital, she went through about 300 pitches before she finally 
landed some capital. And what she decided to do was just go 
back home and raise capital from her church_from physicians, 
lawyers, and working-class families there.
    So, when we don't diversify the access, we are also holding 
back people who understand us. It is almost like, when you 
think about the reason that we need diversity in healthcare is 
we need more diverse doctors who understand more diverse 
people, and it is the same thing with investing. We need more 
people with diverse mindsets who understand how Black and Brown 
people spend their money and what we think about risk and what 
our risk tolerance level is based off of who we are.
    I think that is the chance that I didn't get, that no one 
understands what my risk tolerance is.
    Mr. Huizenga. And it might be different than your neighbor.
    Ms. Bell. And it might be. But I need the opportunity to be 
able to--
    Mr. Huizenga. To be able to make that judgment.
    Ms. Bell. Yes.
    Mr. Huizenga. I know my time is up, and I kind of picked on 
Mr. Olivencia, but if you could maybe wrap it up, and your 
thoughts on this.
    Mr. Olivencia. Just simply, I would say, it goes back to 
what Eli Velasquez said about groups--
    Chairwoman Wagner. I'm sorry. The gentleman's time has 
expired. If you could submit it in writing, I would appreciate 
it. Thank you.
    Mr. Huizenga. Madam Chairwoman, thank you.
    I appreciate you all being here and sharing your stories. 
And I yield back.
    Chairwoman Wagner. Thank you.
    The gentleman from Illinois, Mr. Casten, is now recognized 
for 5 minutes.
    Mr. Casten. Thank you--
    Chairwoman Wagner. No. I thought I was going down the 
aisle. I apologize. The ranking member, Mr. Sherman from 
California, is now recognized for 5 minutes.
    Mr. Sherman. Everyone in the audience should know, you will 
get to hear from Mr. Casten soon. He will be very interesting.
    Professor Fletcher is right to the extent that, obviously, 
the best investor protection is when you have the liquidity of 
the publicly-registered company. You get audited financial 
statements. The statement is getting not just an audit but also 
a Public Company Accounting Oversight Board (PCAOB) review and 
an audit of the internal control system.
    The only problem with that is that it is millions of 
dollars to provide all that. And that doesn't count the 
millions of dollars that are then spent by the investment 
analyst industry. If you want to buy Apple or Disney, you are 
sitting on top of an information system and information-
checking system that involves hundreds of millions of dollars, 
together with all of the analysts on Wall Street.
    Now, one could say, ``Let's close off the private markets 
to everything other than big companies.'' The private markets 
are much bigger than someone who focuses on securities 
regulation would realize, because we are used to, say, you are 
doing a Regulation D, and there are 15 people in the room, or 
300 people, and they are all getting stock certificates. Every 
pizzeria is a guy with a brother-in-law who put up money for 
the--every four-unit apartment building is a couple of 
dentists. And there are a lot more pizzerias and apartment 
buildings than there are these offerings that we tend to focus 
on here.
    So, we need a system where we determine that at least the 
pizzerias and the apartment buildings, et cetera, are going to 
be illiquid. There are not going to be audited financial 
statements, et cetera, et cetera, and people are able to make 
their investments. Are we going to then allow that to be in 
private companies?
    As long as we have a Regulation D that focuses on wealth, 
it is very hard to justify that we don't index that for 
inflation. If Ronald Reagan's people were right that it should 
be a million dollars then, it should be $3.5 million now. But 
many of our witnesses have said that wealth shouldn't be a 
barrier. It seems unfair, and it seems illogical.
    The focus here is on sophistication of either the 
investor--well, it's unfair to say that you can't invest if you 
don't have an MBA--or the investment advisor, who is truly 
independent.
    Mr. Olivencia, you are no sucker. We have established that. 
But what standard should we have? Do we include all of the CPAs 
and attorneys? Should there be a separate--and we are licensing 
somebody to advise on everything from a soup company to a nut 
company. So, is there any particular standard for what is a 
sophisticated investor? Or a sophisticated advisor?
    Mr. Olivencia. Thank you, Ranking Member Sherman.
    I think there are a couple of things that were mentioned, a 
lot of them recommendations from the Angel Capital Association.
    One, I think the licenses were a great start, but also 
education. We have MBAs out there_I had an MBA and I still 
wasn't accredited. I had all the knowledge from a leading 
university. So, education, education--
    Mr. Sherman. I am not sure Larry Summers would qualify.
    Chairwoman Wagner. I disagree.
    Mr. Sherman. Oh, I mean under the standards we have now. 
That is not a dig at Larry Summers; that is a dig at the 
standards.
    Mr. Olivencia. I understand.
    I think examinations are another one. And that could be 
done through the Angel Capital Association.
    Self-certifications--
    Mr. Sherman. Should we have different standards for whether 
you are a sophisticated investor or whether you are an advisor 
capable of making somebody else qualify?
    Mr. Olivencia. The advisor side is something new, and I am 
not--they probably need a lot of safeguards around that one.
    Mr. Sherman. You certainly need independent safeguards.
    Mr. Olivencia. Correct.
    Mr. Sherman. And I realize it is not enough to have a 
fiduciary standard; you also have to have no commissions and no 
referrals. So, it has to be my person who is advising me, not 
the promoter's person who is advising me and then gets a 
referral and advises the next investor and the next investor.
    Mr. Olivencia. How do you police that, as well, would be--
    Mr. Sherman. With all of these, if you violate Regulation 
D, you have an illegal offering. You are liable for whatever 
people lose in the investment, et cetera. Plus, I think there 
are criminal penalties.
    And then, finally, is there anybody here who thinks that 
anybody should be allowed--assuming they don't own the company 
or work in the company every day, but if you are an outside 
investor, should be able to invest more than 10 percent of 
their net worth in one of these? Raise your hands if you think 
that we allow more than 10 percent of net worth from the 
investor.
    I see one hand.
    Chairwoman Wagner. Thank you.
    The gentleman's time has expired.
    Next, I would like to recognize the gentleman from Texas, 
Mr. Sessions, for 5 minutes.
    Mr. Sessions. Madam Chairwoman, thank you very much.
    Each of you have presented yourself well today, and we 
appreciate it. You will soon learn that I align myself very 
much with Mr. Huizenga's proactive viewpoint of why we are here 
today; we are here to determine whether we should change rules, 
regulations, and add in some new ideas.
    Ms. Schulp, before I ask this question, I want you to know 
I am going to be coming to you and I want to give you the vast 
amount of time to respond.
    But I believe that there are ways for us to expand the 
accredited investor definition. That is what we are here for 
today. That is what we are zeroing in on. And I believe that we 
recognize that there can be some limitations, but opening it 
up, I think, would be an advantage.
    Can you spend a little bit more time--you have 4 minutes--
to give us an idea of how we should be thinking about this? 
Perhaps both sides of the equation, but, overwhelmingly, I 
believe we should expand it in legislation that we change.
    Ms. Schulp. Thank you. I agree. I think that there are a 
lot of opportunities here for expanding access for investors 
that will also bring windfalls to entrepreneurs who are also 
seeking capital--
    Mr. Sessions. Is that money? That is an advantage, isn't 
it?
    Ms. Schulp. It is an advantage for entrepreneurs, but it is 
also an advantage for investors. And I will say, the Angel 
Capital Association is very able to speak to this, but it is 
also sharing of knowledge, where serial entrepreneurs who might 
not meet the wealth standards at this point are interested in 
sharing both their capital and their abilities with new 
entrepreneurs looking to start businesses.
    But back to the general question as to what we should do 
here, I think that any sort of incremental change is for the 
better. But taking a look at the broader question, I think that 
the ideal solution, which does not get into these line-drawing 
questions about the SEC making a decision of whether or not an 
individual is sophisticated, is to look at the option of self-
certification coupled with some sort of short-form disclosure 
to investors about the risks of investing in private markets.
    There are unique risks here, and they are different risks 
from the public markets, and it is important for investors to 
understand that. But giving investors the option and the power 
in their own hands to make the decision as to whether or not 
they want to take on those risks is the best option.
    There are a lot of other options, though. These educational 
qualifications are good things to take a look at.
    Mr. Sessions. By the way, you are speaking of advantages, 
not just options.
    Ms. Schulp. They are advantages. But I think what is 
important is that, when we think about it, we don't necessarily 
think about it in terms of advantage as well, because some 
people will make investments and those investments will not pan 
out, and they might not ultimately see it as an advantage at 
the end of the day. But the fact that they had the option to 
make that choice is, itself, the advantage.
    The idea of allowing some sort of test for accredited 
investors to qualify is an interesting one. I am concerned 
about kind of leaving the SEC to design what that test would 
look like and throwing up barriers that make it impossible to 
allow people to prove to the agency their sophistication.
    Mr. Sessions. I think this is part of the development of 
capitalism. We could all have our own ideas about this, but by 
the time someone has something to invest, they, generally 
speaking, have been in a marketplace of capitalism. And I think 
that this is allowing them that enrichment. I don't mean in 
making money; I am saying to participate, as opposed to closing 
it off and having government control what they do.
    I take what you have said as a good start. You talked about 
incrementalism. You didn't talk about kicking the door open. 
But I think that our young chairwoman should listen to this, 
and this committee, and subcommittee, should be very open to 
knowing that in our country--IPOs, new ideas, and investment 
opportunities should be open to all. And there is no certainty 
of anything we do, but I think opportunity is the key.
    I want to thank the gentlewoman.
    Madam Chairwoman, I yield back.
    Chairwoman Wagner. I thank the gentleman.
    And now, it is my supreme pleasure to recognize the member 
of the Minority who was the first to arrive to this hearing, 
the gentleman from Illinois, Mr. Casten, for 5 minutes for his 
questions.
    Mr. Casten. Thank you, Madam Chairwoman. I am pleased to 
offer the moment that Mr. Sherman has been waiting for all day.
    I really appreciate you all being here.
    I want to just start with a quick question for you, Ms. 
Schulp, becauseI think we agree, but I just want to confirm. 
Would you support financial regulations that would impose on 
our private companies the same accounting and public-disclosure 
obligations we put on public companies? Just a quick yes or no.
    Ms. Schulp. No.
    Mr. Casten. Oh, good. I share that view.
    I ask that question--and I hope we all in this room agree 
on that--because after we had John Ray come and testify about 
FTX, I met with one of the larger, very well-known 
institutional investors who lost a lot of money, who came to 
tell me all of the red flags they saw. And this was after we 
learned that they were using QuickBooks for their accounting 
standard.
    Yes, I know some of us may privately use QuickBooks for our 
checking accounts. For all of the people watching us on 
television, that does not pass the test of an audited financial 
report.
    And I asked them, ``How did you possibly make this 
investment?'' I used to run a private-equity-backed company. I 
am not familiar with accessing millions of dollars and not 
having smart 20-somethings crawling all over my accounts.
    I said, ``How did you possibly make this investment?'' And 
they said, ``Frankly, we kind of assumed Sequoia had done all 
of the diligence ahead of us.''
    Now, I am not going to name them, because I don't want to 
hurt their next fundraiser, but this was a sophisticated 
investor. And if we agree that we don't want to put the public 
obligations that are out there, then I guess I am left--and I 
want to turn to you, Ms. Fletcher.
    If we reduced the standard of sophisticated investors below 
the level that is already causing some pretty dumb things to be 
done by these so-called sophisticated investors who lost tens 
of millions of dollars, would that have imposed more or less 
accountability on the leadership of FTX?
    Ms. Fletcher. Just so I understand, the question is, if we 
reduced the level, would it impose more accountability?
    Mr. Casten. Yes.
    Ms. Fletcher. The answer is no.
    The Congressman earlier said that I wanted to ban private 
markets, and that is the furthest thing from the truth. What I 
want is information in the private markets. The private markets 
currently lack all information. We are dependent on private 
funds, on private companies to provide some information when 
they deem it, when they feel like it, and to whomever they 
choose.
    And like you have noted with FTX, we saw how the most-
sophisticated investors that we have in our capital markets 
were duped. No one likes to think of themselves as a sucker, 
which has also been established. None of us think we are a 
sucker. However, what we see with cases like FTX, with cases 
like Theranos, we see that, time and time again, sophisticated 
investors are unable to properly view all of the risks or 
appreciate all of the risks, because they either assume someone 
else has done the due diligence or they assume, if you are 
raising $2 billion, of course this must be good enough. And 
that isn't good enough.
    And that is what is going to afflict our retail investors 
if we open up the definition in that way.
    Mr. Casten. I also just want to emphasize Mr. Sherman's 
point, because one of the other points that this investor made 
to me was that, ``Look, you have to understand the venture 
space. We lose money on 9 of our 10 investments, and we hope to 
make it up on the 10th,'' which means that you have to be in a 
position to lose 90 percent of your seed capital. And if we 
don't have some threshold there, we are going to blow up.
    Let me ask a dumb question, Ms. Fletcher, because I think 
we know the answer to this. But assume the worst of me. Assume 
I am a Ponzi scheme operator who is constantly thirsty for dumb 
money. Would I be supportive of the proposals that the Majority 
is putting out to reduce the standards right now?
    Ms. Fletcher. I feel like you have walked me in there, 
Congressman, but, yes, yes, you would be. Self-certification is 
one of the fastest ways to get some dumb money.
    Actually, Matt Levine wrote a column yesterday in which he 
talked about the self-certification option, and he did so in a 
very extreme and joking manner. However, if we take a look at 
what Matt Levine has to say, he says, basically you are self-
certifying, yes, I am dumb, and, yes, I want to lose all of my 
money, and, yes, I am saying that I will have no recourse.
    And that is really kind of what we are leaving everyone--
retail investors up to if that is the path that we decide to 
take.
    Mr. Casten. So, with the little time left, can you just 
speculate, if you would, what would happen to private wealth in 
this company if we allowed unethical Ponzi scheme seekers like 
me access to that capital?
    Ms. Fletcher. I don't want to call the Congressman 
unethical. In the hypothetical that you have posed, 
Congressman, these Ponzi scheme seekers would be the ones that 
profit at the expense of retail investors, at the expense of 
the private wealth in our country and in our economy.
    Mr. Casten. Thank you.
    I yield back.
    Chairwoman Wagner. Thank you.
    The gentleman yields back.
    It is now my pleasure to recognize the gentleman from 
Arkansas, Mr. Hill, who is also the Chair of our Subcommittee 
on Digital Assets, Financial Technology and Inclusion, and the 
Vice Chair of the full Financial Services Committee.
    You are recognized, sir, for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman.
    And I want to say what a pleasure it is to have you as our 
Chair. You come from the heartland of our country, and you have 
worked in the vineyards of capital markets policy for years 
here on the House Financial Services Committee. And I think it 
is a special privilege to see you as the first woman to chair 
this subcommittee in the history of Congress. I think that is 
an accomplishment. And I think your work as Vice Chair on the 
House Foreign Affairs Committee and as a former Ambassador for 
the United States gives you that global perspective that is so 
critical when we make judgments about capital formation and 
American competitiveness. So, I am grateful you are my Chair.
    We are gathered today to talk about barriers to greater 
opportunities for more people. That is the theme here.
    I appreciate my friend, Mr. Casten's, overviews and 
concerns, and I think they absolutely are true, and I think 
they are shared by everybody on this committee, about how to do 
this in the right way.
    The idea of an accredited investor is supposed to limit 
certain investments to only those investors who are considered 
by this statute that hasn't been updated in 40 years 
sophisticated enough to understand the risks. So, we are taking 
a look at something that really hasn't been looked at in detail 
since I was a staffer on the House Banking Committee 40 years 
ago.
    The SEC's outdated regulations only use arbitrary 
thresholds like income and net worth to shut people out of 
investment opportunities that, in turn, could help them build 
wealth, have financial security, and an expanded future set of 
opportunities. And, in my view, this is to the detriment of 
many Americans but most of all those with knowledge but modest 
income or modest net worth.
    Denying access to opportunity and limiting social-economic 
mobility for that group creates a vicious cycle where 
hardworking Americans with knowledge and capability, but who do 
not meet the statutory definitions from 40 years ago are left 
behind.
    So, I think it is time for us to reevaluate the definition 
of an accredited investor and ensure that it serves its 
intended purpose of protecting investors rather than excluding 
them.
    And what frustrates me is that this is something the SEC 
can do without an Act of Congress. Let me quote the 1933 Act: 
``Any person who, on the basis of such factors as financial 
sophistication, net worth, knowledge, and experience in 
financial matters or amount of assets under management 
qualifies as an accredited investor--qualifies, Madam 
Chairwoman, as an accredited investor--under the rules and 
regulations which the Commission shall prescribe.''
    So, 40 years ago, we certainly ticked off net worth, to use 
that as a definition for financial sophistication. But, as we 
all know, Chair Gensler is too busy trying to change the SEC 
into the, ``Securities and Environment Commission,'' rather 
than its capital formation and investor protection role, and, 
therefore, he is not focused on this very important issue. So, 
I am glad we are.
    We need to have a democratized approach to this to benefit 
more people. And, in that regard, I have introduced the Fair 
Investment Opportunities for Professional Experts Act, which 
would expand the accredited investor definition to include 
people with securities licenses and securities experience but 
also qualifying education or job experience.
    And this is directly related to my work for years in Reg D 
investing and as a banker. We saw people who had invented a new 
technology, who had put up and raised the funds, created the 
board, and yet they couldn't invest personally because they 
were not an accredited investor, and their team couldn't. In my 
view, that is not right.
    So, Madam Chairwoman, I would like to ask unanimous consent 
to insert the SEC's Office of Advocate for Small Business 
Capital Formation Annual Report into the record.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Hill. I would also like to insert a statement from Tani 
Chambers, founder and CEO of RAVN, in the record.
    Chairwoman Wagner. Without objection, it is so ordered.
    Mr. Hill. Ms. Bell, would you agree that this makes the 
case for expanding an accredited definition that could help 
bring a broader group of people into that start-up ecosystem 
and have a better shot at wealth?
    Ms. Bell. I think so. I think it is important to not focus 
on deregulation but focus on derisking, on what could happen, 
what could we be doing to provide information, education.
    The due diligence process, there is one. And so, when you 
are getting into investments, it is not a complete lack of 
information.
    So I would say that, yes, it is an opportunity to provide 
more people with an opportunity.
    Mr. Hill. Thank you.
    Again, I appreciate the Chair, and congratulations again 
for leading this subcommittee And I yield back.
    Chairwoman Wagner. I thank the gentleman for his very kind 
words.
    The gentleman yields back.
    And now, I will recognize the gentleman from North 
Carolina, Mr. Nickel.
    Welcome to the committee, sir. You are now recognized for 5 
minutes.
    Mr. Nickel. Thank you so much, Madam Chairwoman.
    And thank you so much to our witnesses for taking the time 
to be with us today.
    I want to especially acknowledge Professor Fletcher from 
the great State of North Carolina. Thank you for being with us 
today.
    Ensuring people of color, women, and veterans have access 
to capital is a priority for me. Minority-owned businesses are 
critical for our economy. I welcome the efforts by our Chair 
and this subcommittee to enhance capital formation and remove 
roadblocks to ensure entrepreneurs with good ideas can have 
access to the support and resources they need to be successful. 
At the same time, we need to ensure that consumers and new 
investors are properly protected.
    Some of my colleagues on the other side of the aisle have 
put forth proposals to change the requirements to qualify as an 
accredited investor. I welcome this conversation.
    One example of this would be to include individuals who 
pass an exam established and administered by the SEC. I 
believe, at a minimum, this exam should ensure investors have 
the ability to recognize conflicts of interest of broker-
dealers and investment advisors who market investment products 
and the ability by investors to comprehend and use financial 
statements to make investment decisions.
    Professor Fletcher, what are your recommendations to ensure 
that a test like this is as robust as possible?
    Ms. Fletcher. Thank you, Congressman, for that question.
    In addition to the things that you mentioned, it would be 
particularly important in a test such as that, to have the 
ability to understand the risks and to be able to read certain 
financial statements. I also think some form of continuing 
education, some form of recertification after a number of 
years.
    But I do want to also highlight the point that I have been 
driving home quite a bit here, which is that, even with such 
tests and certifications and licensing, we do still have to 
address the problem of the absence of information within the 
private markets.
    And so, yes, licensing to be able to be certain that our 
investors understand things is important. Education is 
important. But also, just the very fact of having that 
information to value these investments is important.
    Mr. Nickel. Thank you for your answer.
    I hope that both parties can work together to ensure that 
minorities have access to the capital they need while also 
protecting working families and look forward to continued work 
by this subcommittee.
    I yield back.
    Chairwoman Wagner. I thank the gentleman for yielding back.
    It is now my pleasure to recognize the gentleman from 
Pennsylvania, Mr. Meuser.
    We want to say, first, welcome to the Financial Services 
Committee and to the Capital Markets Subcommittee. You are now 
recognized for 5 minutes.
    Mr. Meuser. Thank you, Madam Chairwoman, very, very much, 
for being on the Financial Services Committee, but especially 
for being on your subcommittee.
    And thank you to all of the witnesses.
    So, 13 percent of American households qualify under this 
accreditation standard, right--investment. That is the 
information we have.
    I want to ask about what reforms you recommend, and you 
offered some of those in your opening statements, but is there 
one particular provision? Is it the level of income?
    Ms. Bell, let me ask you, is there one particular provision 
that disqualifies most from being accredited investors?
    Ms. Bell. Yes. Let me make sure I understand your question. 
You are asking, is there a provision that I favor out of the 
ones that are being presented?
    Mr. Meuser. Yes, that would make the biggest difference.
    Ms. Bell. I believe the one that is expanding the 
definition where you can use your job and use your actual work 
experience to qualify. That would be most aligned with the 
experience that I have had, where I have had access to 
thousands of founders but still could not qualify because of 
income.
    Mr. Meuser. Would you work that out perhaps on a percentage 
basis of what their income is? Or would you just say that 
should qualify for any level of investment?
    Ms. Bell. That is a good question. Thank you for that.
    Mr. Meuser. Yes.
    And my other question is this, what about borrowing? Can 
they borrow in order to invest? Are you asking for a reform 
that would permit that?
    Ms. Bell. I think having investments that you can make that 
are derisked to test, right? I think we have acknowledged that 
if you are making investments, there are going to be some 
risks.
    Mr. Meuser. Yes. Sure.
    Ms. Bell. So, being able to make investments at a certain 
level that makes sense for your income would make the most 
sense as a beginning to walk you into the process.
    Mr. Meuser. Do your investors receive some sort of 
accountant-reviewed financial statement, Mr. Olivencia?
    Mr. Olivencia. Yes, we do. And it goes back to the 
information.
    A key point that I want to re-emphasize is investing in 
groups. Whether it is Angeles Investors, or Commune Angels out 
of Detroit, we invest in groups. We do receive information.
    Mr. Meuser. And that would exist whether they are 
accredited or not, right?
    Mr. Olivencia. Well, it exists. You may not have access to 
it if you are non-accredited, because you get special rights to 
information.
    I started my angel-investing career 10 years ago. I was an 
executive at a Fortune 100 Company, and I barely made that.
    I think everybody in here in general thought it shouldn't 
be more than 10 percent. But I think if you drop the annual 
salary maybe $50,000, you open it up to a lot more people who 
have the right education, certifications, et cetera.
    Mr. Meuser. What are your losses, bad debt, on a regular 
basis within your investment portfolio--on an annual basis?
    Mr. Olivencia. I have invested in about 70, and I have 2 
that have been marked up to more than a billion in valuation. I 
have about 10 that are over 100 $billion in valuation. Of the 
70, in about 7 or 8, I have lost everything.
    Mr. Meuser. Okay. So less than 10 percent of the aggregate, 
as well, of the overall investment, not just the number of 
losses?
    Mr. Olivencia. Right.
    Mr. Meuser. Okay.
    Ms. Bell, what about you?
    Ms. Bell. With us, we are a nonprofit, and so our capital 
is grant capital.
    Mr. Meuser. Mr. Velasquez, what percentage of bad debt or 
losses do you see?
    Mr. Velasquez. Remember, I started investing 2 years ago, 
so I am a baby angel. We don't even have the ability to--so we 
just made those early investments.
    Mr. Meuser. Okay. That sounds like it is positive, though.
    Mr. Velasquez. I hope so.
    Mr. Meuser. You are still there, so that is a good sign.
    Let me ask Ms. Schulp then, what changes, reforms--I know 
you have mentioned some. We are primarily talking about the 
level of income of a household, of an individual, of a spouse. 
What other reforms would make sense to expand the number of 
people who can be accredited investors?
    Ms. Schulp. I think there are a lot of different ways to do 
it that aren't these kind of bright-line tests of wealth and 
income. And I think that you start to run into difficulties, as 
well, when we talk about work experience, where you say, 
``Well, someone who has an MBA must know what they are doing.'' 
But that would exclude the entrepreneur who started an online 
company out of their home and was unable to prove those types 
of credentials.
    An exam gets rid of some of those problems, but you don't 
want to have the exam be so difficult--
    Mr. Meuser. I am just about out of time. Thank you. And if 
I could get a response in writing, how do you find your 
investors? Do they come to you? Do you go to them?
    I am out of time, Madam Chairwoman, so I yield back. Thank 
you.
    Chairwoman Wagner. I thank the gentleman for yielding back.
    It is now my pleasure to recognize the gentlewoman from 
California, Ms. Waters, the ranking member of the Full 
Financial Services Committee, for 5 minutes.
    Ms. Waters. Thank you so very much, Chairwoman Wagner. You 
look good in that seat. Thank you.
    Chairwoman Wagner. It feels good, Ms. Waters.
    Ms. Waters. I hope you don't have it for too long, though.
    Okay. Chairwoman Wagner, before I begin my questions, I 
would like to ask unanimous consent to submit a report for the 
hearing record that was released by the North American 
Securities Administrators Association entitled, ``Report and 
Recommendations for Reinvigorating Our Capital Markets.''
    Chairwoman Wagner. Without objection, it is so ordered.
    Ms. Waters. Thank you.
    I am going to direct my question to Professor Fletcher.
    You state in your testimony that expanding securities law 
exemptions, particularly the exemptions for accredited 
investors, fundamentally weakens protections for retail 
investors.
    I recognize that the current definition of an accredited 
investor is too heavily focused on income and wealth as an 
indication of financial sophistication. Having money certainly 
doesn't mean that you are savvy with it.
    However, I am also concerned that if we effectively open up 
the high-risk securities market to retail investors, they may 
become prey to unscrupulous financial intermediaries who may 
also have conflicts of interest and be all too willing to 
recommend terrible products.
    Could you please elaborate on the risk to retail investors 
when they are marketed unregulated and unregistered securities?
    Ms. Fletcher. Thank you, Congresswoman.
    Yes. So, within the private markets, if we open up access 
to private offerings to our retail investors, what we can 
expect is that there is no information requirements within the 
private markets, nothing along the lines of what we have within 
the public markets of disclosures, of financial statement 
requirements.
    My esteemed panelists have talked about how within their 
own organizations, they are able to get information. However, 
they are acting as a group, and they don't face collective 
action problems that we would expect our retail investors to 
face in trying to get that information from private funds or 
from private companies.
    So, there will be that lack of information. And that lack 
of information will have certain follow-on consequences for our 
retail investors, including a lack of liquidity and a lack of 
an ability to value the company.
    We have seen many of these examples. The lack of liquidity_
we saw that with Blackstone's real estate investment trust, 
which has prevented its investors from redeeming their shares. 
And we have also seen the lack of valuation, accurate 
valuations, when we think about FTX and how that valuation 
ballooned from $8 billion to $32 billion within 2 years, with 
no one being able to kind of check what that valuation was.
    We can expect much of the same and worse for our retail 
investors.
    Ms. Waters. To illustrate the risk, could you give specific 
examples where institutional investors, despite their supposed 
sophistication, are still victims of fraud and abuse? The 
collapse of FTX as well as the subprime mortgage crisis are two 
that come to mind.
    Let me just say, ladies and gentlemen, this issue is being 
revisited. We have dealt with this before. I did not realize 
that the information was not available, in the way that you 
just described it. I don't think anybody would be against them 
having the same kind of information that is required in other 
ways.
    What are some examples?
    Ms. Fletcher. You have highlighted two of the most 
prominent examples, with FTX and the global financial crisis. 
But we also have other examples, like Theranos. Theranos, which 
has been a part of a massive fraud scandal now, that also was a 
company that was in the private markets and raised billions of 
dollars, and was able to do so despite what we now know: that 
the product that was being offered was not valuable in any way.
    And so, when it comes to this question of information, as 
you have mentioned, Congresswoman, one of the things to note 
here is that in the private market, private offerings can 
discriminate within their investors as to what information to 
offer and to whom and when and at what level, right? And that 
is part of the bigger issue, in my opinion, that we face if we 
allow retail investors to get into that space.
    Whereas Ms. Schulp had said earlier that she wouldn't agree 
for the full level of disclosures that we have within the 
public markets to also be a part of the private market, I do 
think that there is a lot of space in between what we have now 
and having public-market disclosures be in the private market.
    So, it is not either all of the public-market disclosures 
or none; there is some middle ground. And we do need to be 
thinking about what that middle ground can or should be.
    Ms. Waters. That is very important.
    I yield back the balance of my time.
    Chairwoman Wagner. I thank the ranking member.
    It is now my pleasure to welcome the gentleman from Iowa, 
Mr. Nunn, to Congress, to the Financial Services Committee, and 
to the Capital Markets Subcommittee. The gentleman is now 
recognized for 5 minutes.
    Mr. Nunn. Thank you very much, Madam Chairwoman. And it is 
a privilege getting to serve with this august team both of 
fellow freshmen and of experienced senior leaders.
    Thank you so much for the members of the committee today 
who have gotten to hear testimony from the group in front of 
us. You each have incredible life stories.
    I am going to start, Ms. Bell, with you. You are an 
inspiration to my five young daughters, and hopefully they can 
follow in the incredible life that you have led.
    Your organization, Black Girl Ventures, provides minority 
female founders access to a network in order to attract capital 
from around the country.
    One of the economic issues that has arisen over our country 
in the last 2 decades is really that the concentration of 
venture capital and early-stage investing has largely only 
supported certain parts of the country. While there has been 
some modest growth in this type of investment outside our two 
coasts, most of the venture funding still goes to just three 
locations--California, Massachusetts, and New York.
    Now, there are some good things that come out of New York, 
so that is fair.
    Mr. Garbarino. Me.
    Mr. Nunn. Yes, exactly.
    There is a lot that needs to be done to incentivize venture 
in Iowa and other States like Iowa that are rural areas where 
we have a lot of good opportunity. But one that certainly seems 
to help would be the expanding of the pool of potential 
investors into young and private businesses.
    Ms. Bell, in your view, how would you recommend we expand 
the definition of accredited investors to promote capital 
formation in parts of the country and in communities that have 
not benefited from such growth or funding over the last 2 
decades?
    Ms. Bell. Thank you.
    I think that people want an opportunity to get in, right? 
We want to figure out what that means.
    And so, when I think about how you would expand the 
definition, one of the ways I would consider is, I do think a 
$150,000 threshold could be more fair when we look at the 
percentage of the country that is able to get there.
    I think right now we are talking about who is there 
already, who is already at a certain level of wealth. But part 
of the conversation is, who is trying to get there? And as I 
have worked myself here, I don't want you to now move the 
needle again and then I am shut out again.
    I think there is a large pool of potential investors who 
are kind of waiting in the wings. A lot of the examples that we 
are talking about are not including Black people and they are 
not including the early-stage companies by Black and Brown 
people, and that is because those Black and Brown people are, 
despite being the fastest-growing entrepreneur segment in the 
country, still receiving less than 1 percent of venture 
capital.
    So, if we can open up and expand the definition and more 
people can get in, then more investment can go to Black and 
Brown founders.
    Mr. Nunn. I would absolutely agree with you on that, Ms. 
Bell. And I would also expand it to say, folks across the 
country, there's a lot of diversity out there, a lot of great 
entrepreneurs ready to take up the mantle in the same way you 
have.
    I do want to ask where the government can be helpful here 
or where maybe the government needs to get out of your way and 
just let you do you?
    One of the notions we hear is that the current SEC seems to 
embrace that private offerings are too risky and that most 
individuals aren't able to understand the risk and reward 
associated with such offerings. I think you and I both agree 
here that this vastly underestimates the intelligence and the 
financial sophistication of a lot of Americans whom, as you 
know, may not be wealthy enough to be able to jump into this as 
a qualified accreditation.
    What, in your view, would be the best way to recommend to 
the SEC someone's financial sophistication regardless of their 
wealth?
    Ms. Bell. Great question. Thank you.
    I think we have to think about what other intermediaries 
could exist?
    Our particular organization would be considered an 
ecosystem-building organization, an entrepreneurial-support 
organization. There are other entities in the country that may 
be able to help qualify, organizations like ours, and 
organizations like community development financial institutions 
(CDFIs), and other financial institutions or people who are 
working with small businesses directly that would be able to 
help the investors also feel that the investments are derisked.
    I think the key is, is there a way to support and fund 
other intermediaries that the SEC would govern but don't have 
to be the SEC or don't have to be FINRA? We are only talking 
about two, when there are hundreds of ecosystem-builder 
organizations out there that could get certified to be able to 
handle some of the lift of what it would mean to define 
sophistication.
    Mr. Nunn. Thank you, Ms. Bell. I can see why you have 
succeeded so well in this space. I really appreciate that.
    Ms. Bell. Thank you.
    Mr. Nunn. And, with that, Madam Chairwoman, I yield back 
the remainder of my time.
    Chairwoman Wagner. I thank the gentleman for yielding back. 
We have to get used to this yielding back of time. I am 
grateful.
    It is now my pleasure to recognize the gentleman from New 
York, Mr. Meeks, with whom I have had the great pleasure of 
serving on both the Financial Services and Foreign Affairs 
Committees for a number of years.
    Sir, you are recognized for 5 minutes.
    Mr. Meeks. Thank you, Madam Chairwoman.
    And thank you all for your testimony today. We have been 
paying very close attention to it in our offices, and it has 
been tremendously informative.
    I note that it is imperative that we work to level the 
playing field to create more opportunities for investors who 
are women and people of color. Access to pre-IPO investment 
opportunities should not be reserved just for the wealthy.
    And as we have heard you say here today, it is also an 
enormous issue for the recipients of this capital because many 
entrepreneurs, especially those from Black and Brown 
communities, do not have access to the same pool of investors 
as their White counterparts, as you just indicated, Ms. Bell.
    This makes it more difficult for their businesses to scale, 
and it perpetuates the cycle contributing to the generational 
wealth gap, which is what I am focused on closing.
    That said, it is of paramount importance that everyday 
Americans, particularly people of color, are not taken 
advantage of by predatory investment practices.
    The testimony presented here today, I believe supports my 
belief that we are not doing a good job, or a good enough job, 
of expanding access to opportunities while ensuring that 
investors from all backgrounds enjoy strong investor 
protections.
    So I will ask Ms. Fletcher first: What type of population 
is the current accredited investor definition intended to 
serve? And do you feel that by altering the definition or the 
thresholds we could bring more people of color into the field?
    Ms. Fletcher. Thank you, Congressman, for your question.
    Currently, our accredited investor definition targets 
people of a certain income threshold. And, really, what this 
does is it exposes our senior citizens at the highest rate to 
the private markets, who are then taken advantage of by these 
extremely risky investments that sometimes prove to be 
fraudulent.
    If we tinker at the margins with the accredited investor 
definition, whether by lowering it, as some have suggested here 
today, yes, that will open up the pool, but then that doesn't 
change the risks and the issues that are existing in this 
market, which are namely the ones I have underscored so far 
this morning, including the lack of information within the 
market.
    The private-market offerings do not have information-
disclosure obligations. Many of my co-panelists have pointed to 
the fact that they receive information as they determine 
whether or not to invest. They are acting as a pool. They are 
acting as a group. They are able to possibly demand more 
information than you would expect from the average retail 
investor who would be participating in this space if we were to 
lower the accredited investor definition to open it up for more 
Black and Brown people.
    As more Black and Brown people enter that market without 
any kind of investor protection, what we can expect is more 
wealth extraction. We can expect a widening of the gap of 
wealth inequality in this country in which the poor are being 
taken advantage of and they are preyed upon in these markets.
    And that is my deepest concern, as well, as we think about 
how we would expand these markets or whether to even expand 
them without any kind of backstop or protection as we think 
about that.
    Mr. Meeks. Thank you very much.
    And let me ask Ms. Bell, because I was really struck by 
your testimony and your story of creating Black Girl Ventures. 
In fact, I know I have referred my niece to your website, 
because that is what she has been very interested in. It is an 
incredible story of success by any measure, and I appreciate 
that.
    I think that we see eye-to-eye about the need to strike a 
balance between, as just indicated, access and consumer 
protection. And I believe that if we are talking about 
expanding access to people outside of the traditional investor 
set, then the need for clear, transparent, and reliable 
disclosure is paramount.
    So, I wondered if you might be able to share what kinds of 
disclosures you think are best suited for interested investors 
who wouldn't qualify under today's definition of an accredited 
investor?
    Ms. Bell. Thank you. And thank you for referring your 
niece.
    Traditionally, what happens is, you go through due 
diligence, and in that you are required to submit financial 
reports. You also go through interviews with different members 
if you have a group.
    I think the benefit of working with a groupl like Black 
Girl Ventures is, suppose your niece, for example, starts an 
amazing tech company, and we have helped her grow that, we gave 
her access to a grant, we helped her with the mentoring, we 
helped her with all of the information she needed to get to a 
certain place. What we would do is introduce the network, but 
then the network effect is also maybe missing from this 
conversation. Like, investing is a large--even if you are a 
retail investor, it is all network. You get walked in to these 
different networks.
    So, you are not necessarily all alone when you are 
investing. You want to have disclosed pro forma financial 
reports. You want to actually get to know the person, because 
you are also a partner.
    Mr. Meeks. Thank you--
    Chairwoman Wagner. I'm sorry. The gentleman's time has 
expired.
    I would like to ask everyone, both witnesses and Members, 
to please speak clearly and loudly, just like Ms. Bell did, 
into the microphone. We are hearing that the streaming is 
having difficulty picking up some of the audio. So, I thank 
you.
    Next, I would like to welcome the gentlewoman from Indiana, 
Mrs. Houchin.
    Welcome, ma'am, to Congress, to the Financial Services 
Committee, and to the Capital Markets Subcommittee. It is so 
wonderful to have another woman Republican on this committee. 
May you walk in my footsteps. You are recognized for 5 minutes.
    Mrs. Houchin. Thank you, Madam Chairwoman. I am so proud of 
you for earning this position. It is well-earned. And if I can 
follow in your footsteps, I will be doing great things. So 
thank you, Chairwoman Wagner.
    And thank you all for being here today.
    I am an Indiana University (IU) alumnae, and I have seen 
the benefits that come from supporting entrepreneurial culture 
and ample access to early capital.
    One of the many examples of that at IU is the Shoemaker 
Innovation Center. This helps student entrepreneurs build, 
launch, and sustain their own businesses by providing 
resources, programs, and support.
    Another example is the IU Kelley School of Business, which 
is a highly-renowned business school whose alumni are 
represented in management companies of all shapes and sizes.
    We also, in southern Indiana, have the Small Business 
Development Center, which does connect angel investors to 
start-up businesses and assist business owners as they are 
starting this process.
    With that said, I know that not everyone has access to the 
resources and networks that come from established higher-
education institutions and local incubators, particularly in 
rural areas, and part of my district consists of rural small 
towns. And we have heard Mr. Huizenga say that $200,000 here is 
not $200,000 there.
    So my question is, Mr. Velasquez, can you just explain 
briefly how expanding the investor definition would increase 
capital not just for Silicon Valley and major metropolitan 
areas, but also in rural areas of the country regardless of our 
demographics?
    Mr. Velasquez. Absolutely. Thank you for the question.
    One of the things that has come up is, we cannot pick and 
choose one solution; this is a multifaceted approach in order 
to get this complex asset class more engaged and more involved. 
I believe we can walk and chew gum at the same time, right?
    It does involve education. It does involve re-examining the 
income thresholds. When you look at that from across the 
community, these communities can begin to understand where that 
best fits for them.
    I use the story of Lubbock, Texas, with 250,000 
individuals. There, we only have individuals who meet the 
income threshold, but there are others who could participate. 
Like whom? University professors, perhaps, right? But they are 
excluded.
    So one of the things you want to do is look at the solution 
from a multifaceted approach. We can incorporate a multitude of 
these opportunities or these legislation reforms in order to 
get more people involved.
    That being said, when it comes to rural communities, you 
have a very small population, so your angel group is likely to 
be very small. In Lubbock, it was about 30 or so. In other 
cities, like in south Texas, it is about 15 to 20. And it is 
very difficult for them to create critical mass around doing 
investing over and over and over again.
    When you expand the pathway, you bring more people into the 
fold, thereby expanding access to capital.
    Mrs. Houchin. Thank you.
    My next question is for Ms. Schulp. Do you think that 
wealth size or assets under management, in the case of these 
institutional accredited investors, accurately represents 
sophistication?
    Ms. Schulp. I don't think that a determination of wealth 
accurately represents sophistication.
    Mrs. Houchin. And we have heard that the elderly are preyed 
upon. Are we to assume that wealthy members of the elderly 
community are also preyed upon, regardless of their 
sophistication, if it is only based on wealth?
    Ms. Schulp. I don't think wealth has anything to do with 
sophistication in these circumstances. The elderly are 
unfortunately targets for securities scams in all sorts of 
situations, not simply in the private markets.
    Mrs. Houchin. Thank you.
    My last question is for Ms. Bell, just about thoughts on 
risk.
    I was a small-business owner. I understood that there would 
be a lot of risk involved in starting my business. I thought, 
if I could only get one client, I could make it, and I didn't 
anticipate there would be a pandemic, when I started my 
business. But I didn't need the government to protect me from 
myself.
    So I am wondering, can you build wealth without risk?
    Ms. Bell. Thank you.
    No, you can't build anything without--you can't build a 
shelf without risk. I think it is fair to say that when you 
journey into entrepreneurship, that entrepreneurial spirit, you 
are going in knowing that you are taking a risk.
    Mrs. Houchin. Thank you.
    I just want to comment that we are built on capitalism in 
this economy, and having a vibrant and robust economy, I think, 
requires that we allow as many individuals as possible into 
these investment opportunities.
    Madam Chairwoman, I thank you for this time, and I yield 
back.
    Chairwoman Wagner. The gentlelady yields back.
    And I now recognize the gentleman from Massachusetts, Mr. 
Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman. And let me 
congratulate you on your chairmanship.
    We are trying to balance here, right? We are looking at the 
advantages that public offerings have, the menu of consumer-
protection laws that protect people, the requirements for 
disclosure that I think are very helpful to investors.
    On the other hand--and we just saw this in the FTX 
situation; I am the former Chair of the FinTech Task Force_we 
have seen absolute disasters as a result of the small amount of 
information that was available to investors in FTX and other 
crypto-centric companies. Some of them had nothing more than a 
White Paper as a source of information for prospective 
investors.
    The accredited investor definition has been found to be 
discriminatory towards underrepresented investors and a barrier 
to capital formation for minority-owned entrepreneurs. I 
believe we should be shifting this conversation away from 
lowering the accredited investor standard and, instead, explore 
ways in which we can expand access to the public markets, with 
their commensurate consumer protections.
    And, as I said, we held hearings last year, last session, 
when I was Chair of the Task Force on Financial Technology, and 
we explored the fintech venture capital space and the lack of 
diversity in start-up founders. We found that only 2 percent of 
venture capital funding privately goes to woman-owned companies 
and less than 3 percent goes to founders of color.
    And when you think about that, those numbers are 
staggering, when you consider that when, on performance, when 
minority-owned companies receive the funding that they need, 
they actually outperform their White-male-owned company 
counterparts.
    And I am truly skeptical--I could be persuaded, but I am 
not persuaded yet that lowering the accredited investor 
requirements will actually help minority-owned companies get 
the funding that they need in a safe and reliable way.
    Professor Fletcher, could you discuss whether this idea of 
just simply lowering the accredited investor standard would 
mitigate the funding discrepancies and imbalances that are 
problematic for minority-owned businesses?
    Ms. Fletcher. Thank you, Congressman, for your question.
    And my short answer to that is, no, it will not. Lowering 
the accredited investor standard will not increase access to 
funding for people of color and for woman founders.
    The fact is, as one of the things that my co-panelist, Ms. 
Bell, noted earlier, that networks build a lot of this funding, 
and networks are shutting out Black and Brown founders. That is 
not a question of the accredited investor definition. That is a 
question of the networks not being opened up to people of color 
and women, as well, of course.
    And what I think lowering the accredited investor 
definition will do instead is open up the victims, the 
potential victims, in this space, given that there is a lack of 
investor protection.
    And while I completely agree that there needs to be more 
funding for Black and Brown businesses, for women-owned 
businesses, lowering their accredited investor standard is not 
the way to get to that funding.
    Mr. Lynch. How do we untie that knot, then?
    We want minority businesses and women-owned businesses to 
have greater access to capital. We realize that the data 
indicates that they are being unfairly treated, they are not 
being judged on their merits. Yet, we don't want to create a 
trap like we saw with FTX and some of these stablecoins, where 
there was no information, people flooded in, and then lost 
their entire savings.
    How do we re-balance that process?
    Ms. Fletcher. I think that is an excellent question, as 
well. I have a couple of thoughts there.
    One thought would be, if we are going to open up the 
private market some, then we do need to have more information 
within that space, right? As I said earlier, it doesn't have to 
be the full-blown public disclosure that we have in the public 
market.
    Mr. Lynch. Right.
    Ms. Fletcher. There are things in between. Other options 
actually include_when we had the pandemic, we turned to 
Paycheck Protection Program (PPP) loans. We thought about ways 
in which we could fund and support businesses during the 
pandemic. Those are other options that we can think of as well.
    And one of the things that I want to note here is that, 
even within our regulatory framework, we have Reg Crowdfunding 
(Reg CF), in which we are able to raise money for smaller 
businesses through funding portals of up to $5 million.
    So, there are currently options available that we can talk 
about and think about how to strengthen those options, rather 
than going straight for lowering the accredited investor 
standard and opening up retail investors to potentially being 
victims of fraud and abuses within the private markets.
    Mr. Lynch. That is great. Thank you.
    Madam Chairwoman, my time has expired, and I yield back.
    Chairwoman Wagner. The gentleman yields back.
    I now recognize the gentleman from Wisconsin, Mr. Steil, 
for 5 minutes.
    Mr. Steil. I thank the Chair. I appreciate the proper 
Luxembourg pronunciation of the last name, Madam Ambassador.
    And congratulations on your first hearing. It is good to be 
able to call you chairwoman of the subcommittee. It is great to 
be here.
    And to the witnesses, thanks for being here.
    I want to stage-set a little bit. I actually got a phone 
call, unsolicited, to my office, as many people like to call 
and give their advice, guidance, counsel, their opinion of the 
day. And it was a gentleman from Beloit, Wisconsin, a city that 
is new to my congressional district, but a place where I spent 
about 8 years working. It has about 35,000 people, is 
economically challenged in some ways, but is an awesome city, 
with hardworking folks.
    He called in and left a message and was upset that he was 
blocked by the accredited investor standard to invest in early-
stage companies. It is actually not a call that I get terribly 
often.
    I got a lot of calls about the balloon last week, and some 
other topics, admittedly. But this gentleman called in on that 
topic, and he was actually really frustrated that the 
accredited investor standard prevented him from investing in 
early-stage companies, allowing him to build wealth.
    And in his call, he said, ``This law keeps the low-income 
from entering high-income status and, on its face, is unfair.''
    I think I pretty much agree with this gentleman who called 
the office. I have to call him back. I didn't get time between 
then and the hearing to learn more about his story, but I think 
his story is the story of a lot of people--people who have 
unique knowledge and expertise in a given area but may not have 
hit the actual accredited investor standard as written a long 
time ago.
    And so, for sake of discussion, I would love to see a show 
of hands of how many of our panelists here today are accredited 
investors.
    Okay, so not everyone. Four out of five.
    And how many have been accredited investors for at least 10 
years?
    One.
    That, to me, flags an issue. We have absolute experts here 
at the table with us today, people who have shared with us 
incredible stories, who have acumen on investing, and 
understand the issues before us, but we only have one out of 
five who has been an accredited investor for the past 10 years. 
That flags to me that we have a challenge here that Congress 
can remedy, because it was Congress that put in place many of 
the rules and regulations that oversee this standard.
    To dive in just a little further, if I can, Mr. Velasquez, 
you described in your testimony you worked for companies for 2 
decades to help early-stage companies get funding and to build 
angel networks in the U.S. and around the world, yet, for much 
of your career, you didn't qualify as an accredited investor--
what we just saw here with our panelists.
    As the founder of Investors of Color, can you describe how 
the current accredited investor standard excludes investment 
professionals who come from minority backgrounds or who start 
with less than inherited wealth?
    Mr. Velasquez. It absolutely limits their ability to 
participate.
    One of the biggest challenges we had within Investors of 
Color was finding them. We spent 4 years building that network 
of 800 individuals and organizations. And we had to rely on 
small networks, small communities.
    Gentlemen like maybe the one who called your office, he 
would qualify. So, we are not totally exclusive, but we want 
individuals who have been left out to be able to find pathways 
into it.
    And what we are looking to do is create pathways. We are 
not deregulating; we are not reducing. We are expanding 
pathways for access. And this is what we are ultimately trying 
to advocate for.
    Mr. Steil. Thank you very much.
    And how would you respond to those who are arguing that the 
current accredited investor standard is justified because it is 
necessary to protect investors?
    Mr. Velasquez. I will go back to statements I made earlier. 
Within the Angel Capital Association--16,000 members, 250 angel 
networks, platforms, family offices--we don't see that fraud.
    We invest $950 million into our economy every single year. 
We look at thousands and thousands and thousands of deals. We 
don't see that fraud.
    You will see a bad company made by a group of friends who 
decided to go off and make an investment on their own. They 
maybe had a fear of missing out.
    I would argue that those who met that accredited investor 
definition and claimed to be sophisticated, yet made the 
investment in FTX under an assumption, are not sophisticated 
investors, because that is not what angels would do.
    Mr. Steil. Maybe I will shift to you, Ms. Bell. Do you 
think the accredited investor standards are justified and 
necessary to protect investors?
    Ms. Bell. I don't. I think that it takes more than wealth 
to be able to determine whether or not someone is 
sophisticated.
    And I think when my fellow panelist mentioned Reg CF as an 
option, crowdfunding as an option, why do we have to be limited 
to, ``Oh, well, you can do that, but you can't do this?''
    Mr. Steil. I think you are right. I think what we heard 
today is the need to look back and reform this provision. It 
leaves a lot of people out--the gentleman who called my office, 
people here at the table.
    Madam Chairwoman, I yield back.
    Chairwoman Wagner. I thank the gentleman for yielding back.
    I believe that we are out of Members. As a courtesy to the 
ranking member, I am going to allow us each 30 seconds to do a 
little wrap-up. And then, I will give some instruction for our 
witnesses, for others, and for our next hearing this afternoon.
    Ranking Member Sherman?
    Mr. Sherman. Private markets are important. They are 
inherently risky. They tend to be small and startup. You don't 
get the level of information. You don't have a level of 
liquidity.
    We shouldn't be lowering standards, but we should be 
rationalizing standards. We shouldn't have wealth as a barrier; 
we should have sophistication. And we have to define what is a 
sophisticated investor, determine whether he can be vicariously 
sophisticated by hiring an advisor. And any advisor has to be 
absolutely independent.
    I yield back.
    Chairwoman Wagner. And I will just close by saying that 
Congress must work to expand opportunities for all investors 
and entrepreneurs in the securities markets and in order to 
create long-term, sustainable growth within our economy.
    You all sitting at this table are the essence of the 
American Dream. You are the entrepreneurs. And we should not be 
regulatorily standing in your way of building your 
opportunities, for your families and for others. I applaud each 
and every one of you.
    Mr. Velasquez, you have more than earned your wings, and so 
have all of you at this table.
    It has been a pleasure. I thank you. And we look forward to 
moving forward on some of these legislative proposals.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And before adjourning, I want to just remind everyone--
there are not many Members remaining, but certainly staff is--
that we are going to have a hard gavel in the main hearing room 
at 2:00, because votes are going to be at 4:00. So, we are 
going to try and do whatever we can to get through our next 
hearing in that timeframe.
    And without further ado, this hearing is adjourned.
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]

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                            February 8, 2023
                            
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