In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty,, reviews a recent lawsuit challenging on constitutional grounds the SEC’s accredited investor requirements and considers the lawsuit’s potential implications. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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Is there a constitutional right to invest? Yes, according to a recently filed lawsuit (ICAN Lawsuit), which challenges the SEC’s current accredited investor threshold. As discussed below, the ICAN Lawsuit allegations provide an interesting example of the intersectionality of individual constitutional rights and securities risk, while also creating novel D&O insurance claims and underwriting considerations.
Investors Choice Advocates Network (ICAN) filed its complaint on behalf of healthcare CEO Emily Kapszukiewicz and others against the SEC in the Northern District of Texas, challenging the SEC’s long-standing accredited investor rule under Regulation D. In part, ICAN alleges that the SEC’s current accredited investor threshold is unconstitutional. The SEC accredited investor threshold provides that an individual must have a net worth of at least $1 million or income exceeding $200,000 in each of the two most recent years. The ICAN Lawsuit contends that this requirement violates the First and Fifth Amendments to the United States Constitution.
If the ICAN Lawsuit is successful, access to alternative assets, including Private Equity, Private Placements, Private Credit, or other structured product opportunities, may significantly increase for individual investors. This may, in turn, increase D&O underwriter exposure to retail investor securities class actions, inquiries, or event-driven claims stemming from a “riskier” investment.
As a lawyer, I know I took constitutional law during my 1L year, but I do not recall the right to invest being included in either the First or Fifth Amendments, per the Equal Protection Clause. Thus, I am taking the opportunity to review both amendments as well as the allegations of the ICAN Lawsuit in case a decision by the Northern District of Texas, or indeed the SEC, expands eligibility or right to invest in alternative assets.
First and Fourteenth Amendments
First, it should be noted that the ICAN Lawsuit asserts five causes of action, two of which allege that the SEC’s accredited investor financial threshold is unconstitutional. The other three counts ask that the court, pursuant to the Administrative Procedure Act, set aside the SEC’s threshold under Regulation D because the agency’s action is not lawful, is arbitrary, capricious, an abuse of discretion, and the accredited rule exceeds the SEC’s statutory authority.
While I will discuss the ICAN lawsuit’s specific allegations below, I think it is important to first highlight the plaintiff’s constitutionality arguments, which are as follows.
The First Amendmentof the Constitution, in part,states that Congress cannot make any law that infringes on freedom of speech, free press, free exercise of religion, peaceful assembly, or the right to petition the government for redress of grievances. First Amendment rights are not absolute. The U.S. Supreme Court has allowed restrictions on speech that may include speech that incites, constitutes true threats and intimidation, is obscene, and defamatory, so long as such restrictions are content-neutral and narrowly tailored.
The ICAN Lawsuit alleges that Kapszukiewicz’s desired investment in a healthcare-focused venture fund constitutes a form of expressive and associational conduct, which the SEC is unlawfully restricting with its wealth-based accredited investor threshold. Notably, the Supreme Court has previously held that spending to support a candidate or cause is considered protected speech under the First Amendment. So perhaps investing to support a capital raise or to have a private placement share in a start-up should also be constitutionally protected?
In addition, the ICAN Lawsuit alleges that the SEC’s accredited investor rule violates the Fifth Amendment, which incorporates the Equal Protection principles of the Fourteenth Amendment, prohibiting the federal government from denying any person the equal protection of the laws. The ICAN Lawsuit alleges that the SEC’s accredited investor rule is a wealth-based classification that treats financially sophisticated individuals differently based solely on their net worth and income, without sufficient justification for the purported disparate treatment. The Supreme Court has not yet recognized spending money or investing as a fundamental right under the Equal Protection Clause, as it has for voting or marriage.
The ICAN Lawsuit
Considering the constitutional grounds on which ICON is challenging the accredited investor rule, I will briefly review the facts of the underlying case. The representative plaintiff, Emily Kapszukiewicz, is a healthcare executive who purportedly holds advanced economics degrees and has a net worth of roughly $850,000. According to the complaint, Kapszukiewicz also has professional experience in healthcare financial modeling and strategy; however, she was barred from investing $25,000–$35,000 in a healthcare-focused venture capital fund, Health Care Shares.
The ICON Lawsuit further alleges that the same venture fund’s managers deemed Kapszukiewicz qualified to serve as a fund advisor and receive carried interest. The venture fund also allegedly appointed her CEO of a portfolio company, Owl Therapy, where SEC rules allowed her to both raise capital from accredited investors and invest directly as an officer. Health Care Shares is also a named plaintiff in the ICON Lawsuit and, for its part, alleges harm from being prevented from accepting investments from healthcare professionals, who have the expertise but who do not meet the accredited thresholds.
According to the ICON Lawsuit, the accredited investor rule allegedly shrinks Health Care Shares’ potential investor base, reduces its assets under management, and impedes its mission to leverage physician and healthcare executive expertise to fund innovation in the sector. In sum, the ICON Lawsuit claims that the SEC’s accredited investor rule perpetuates a two-tiered system that entrenches wealth inequality, limits minority participation, and excludes professionals who could responsibly evaluate private investments.
Discussion
D&O underwriters may want to monitor the ICON litigation, not only to see whether the Northern District of Texas recognizes a constitutional right to invest, but also whether D&O claims exposure may expand. If the plaintiffs’ arguments are successful, the pool of eligible private investors may increase significantly, and fundraising dynamics may shift focus to individuals or families with a lower net worth. Private assets that are considered riskier or heavily impacted by market changes, which can lead to insolvency, may result in increased investor inquiries, Blue Sky law claims, or allegations of fraud.
As D&O Diary readers are aware, the Trump Administration has recently facilitated the ability for 401(K)s and other defined-contribution retirement plans to invest in alternative assets. Why not break down the accredited investor wealth-based barrier? To successfully do so, the ICAN Lawsuit plaintiffs will need to show that the SEC’s accredited investor thresholds substantially burden free expression (investing) more than necessary and that less restrictive alternatives could serve the SEC’s investor protection goals.
Whether the Northern District of Texas will view the right to invest as a right under either the First or Fifth Amendment remains to be seen. However, in the SEC’s first rulemaking agenda since Republicans took control of the agency, one agenda item included proposing a rule to “facilitate capital formation and simplify the pathways for raising capital for, and investor access to, private businesses.” Thus, even if the ICON Court does not find the accredited investor threshold unconstitutional, the SEC may take matters into its own hands.
The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with the author’s company, colleagues, or clients. The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter.