SEC Changes Rules On Accredited Investor Definition, Will Consider Knowledge And Sophistication

SEC Changes Rules On Accredited Investor Definition, Will Consider Knowledge And Sophistication

The Securities and Exchange Commission amended its definition of an “accredited investor” — one of the principal tests for determining who is eligible to participate in U.S. private capital markets. SEC Chairman Jay Clayton is sworn in on Capitol Hill, March 23, 2017. (AP Photo/Pablo Martinez Monsivais)

The Securities and Exchange Commission today amended its definition of an “accredited investor” — one of the principal tests for determining who is eligible to participate in U.S. private capital markets.

Until now, investors were deemed accredited by the SEC if they had a net worth of more than $1 million, annual income of more than $200,000 or they met certain legal requirements. This opened the door to access to private financial markets that the broader public was excluded from.

For the first time, individuals will be able to participate “in our private capital markets not only based on their income or net worth but also based on established, clear measures of financial sophistication,” SEC Chairman Jay Clayton said in a press release.

Most African Americans have historically been excluded from accreditation. In the footnotes of his public statement, Clayton included the following: “African-American wealth levels are just 8 percent of non-minority wealth levels.”

The SEC amendments allow investors to qualify as accredited “based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth,” Clayton said. “The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.”

The SEC oversees regulated cryptocurrency token offerings in the U.S., and has cracked down on unregulated offerings as illegal securities sales, CoinDesk reported. The change will help grow the pool of Americans who can be in compliance when investing in token sales.

The SEC itself acknowledges the expanded definition might not grow the pool of accredited investors that much, CoinDesk pointed out. The document released Wednesday states:

“We do not expect that number of newly eligible individual accredited investors to be significant compared to the number of individual investors that currently are eligible to participate in private offerings, and (2) we expect the amount of capital invested by such newly eligible individual investors to have minimal effects on the private offering market generally.” 

However, the move is still promising, according to Andrew Hinkes, an attorney with the Florida law firm Carlton Fields.

“Not meaningful at least not yet,” Hinkes tweeted. “Most investment bankers are probably accredited investors already, so this might add to a few people who sell private placements for a living to the list of people who can buy private placements. BUT the flexibility to add certifications, designations, or credentials in the future opens the doors to new, more meaningful additions.”

Hinkes encouraged people to create meaningful change at the SEC by voting. “If you want more people to have access to private placements, VOTE for members of Congress who support that policy,” he tweeted.

“The modernization reflects the SEC’s willingness to continue to consider further expansion of the definition to include other certifications or credentials and includes an invitation for the public to offer suggestions,” Hinkes told CoinDesk on Wednesday.

One of the benefits of accreditation is that it’s an opportunity to invest in small businesses with missions you care about, according to Cadence. Another is that private placements often offer higher yields than what’s offered in the public markets.

People posted comments about the SEC’s definition change on Hacker News, a social news website run by startup incubator Y Combinator.

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“These are good steps, but abolishing all wealth-tests entirely would still be better,” gojomo posted. “There’s no wealth-test that prevents a person from losing all their money in highly-leveraged investments… There’s no wealth test against putting all one’s cash into gambling …There’s no wealth test before purchasing legal but addictive & judgement-impairing substances like alcohol & marijuana. But if you want to put $5-$20K into a friend’s business, or a business you know well, the SEC makes it hard unless you’re already a millionaire. It’s insanely paternalistic & economically destructive.”

Another respondent at Hacker News, mywittyname posted, “There’s a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater the incentive.
Public companies have regulations that help prevent such fraud…Private markets don’t have these regulations because the assumption is that past financial success is indicative of financial sophistication. It doesn’t prevent fraud, but at least it helps reduce the likelihood…If you start making private markets open to everyone, then there’s no reason to differentiate between public and private markets anymore. Companies will go back to all being ‘private’ because there are fewer regulations, then there will be another Enron, and a subsequent shift towards regulation to prevent another such scandal.”

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