Racial Exclusion in Private Markets: How the New Accredited Investor Standard Is Arbitrary and Capricious
Grier E. Barnes
Private markets have exploded. This growth has created lucrative opportunities for businesses raising capital and those who qualify to invest. For decades, Securities and Exchange Commission (SEC) rules have restricted most private investments to “accredited investors,” a designation that, for members of the general public, was based exclusively on affluence. While critics of this regime have emphasized its role in exacerbating inequality, scholarship has neglected the economic divide between white and Black Americans specifically. This Note fills that void.
In August 2020, the SEC issued the first update to the accredited investor standard since its genesis in the 1980s. Using available data, this Note argues that the accredited investor regime—historically and as amended—systematically excludes Black investors and Black-owned businesses from private markets, which both perpetuates racial inequality and depresses the value of those markets. This Note proposes a framework for an Administrative Procedure Act lawsuit charging that the Securities Act required the SEC to consider these distributional effects when modernizing the accredited investor standard. Finding that the SEC failed to satisfy this statutory requirement and omitted other relevant data, this Note concludes that the accredited investor update was arbitrary and capricious in violation of the Administrative Procedure Act. It then offers guidance on how the agency can remedy its error and avoid repeating it in the future.