The Securities and Exchange Commission (SEC) on Wednesday (Aug. 26) made it easier for rank-and-file investors to take the risk – and potentially reap the rewards – of alternative investments, such as venture capital and hedge funds.
The Commission, by a 3-2 vote, redefined the term “accredited investor” to remove the requirement that managers of certain high-risk funds only accept capital from investors with assets of $1 million or more.
SEC Chairman Jay Clayton said in a prepared statement accompanying the vote: “The Commission’s use of income or wealth as the exclusive proxy for an individual’s financial sophistication and ability to assess and bear risk has long been unsatisfactory. Individual investors who do not meet the wealth tests, but who clearly are financially sophisticated enough to understand the risks of participating in unregistered offerings, are denied the opportunity to invest in our private markets. For example, using only a binary test for wealth disadvantages otherwise financially sophisticated Americans living in lower income/cost-of-living areas.”
Later in his statement, Clayton added that the criteria include “as an alternative to the wealth test … certain professional certifications and designations and other credentials from accredited educational institutions.”
“There is no doubt persons who have successfully obtained these certifications – and maintained them in good standing – are sufficiently financially sophisticated to participate in the private markets,” he said.
Commissioner Hester M. Peirce said in her own statement: “Why shouldn’t mom-and-pop retail investors be allowed to invest in private offerings? Why should I, as a regulator, decide what other Americans do with their money? The alleged justification is investor protection: People can’t lose their money on investments if they aren’t allowed to invest. Yes, that is true, but where does that principle take us? Someone who does not invest at all will not lose any money on investments. She will, however, lose. She will lose the opportunity to see her money grow more than it could sitting in a bank account. She will lose the opportunity to be part of enterprises that she believes will transform society. And she will lose her right to make decisions for herself.”
In a joint statement opposing the specifics of the change to the accredited investor rules, Commissioners Allison Herren Lee and Caroline Crenshaw wrote: “The accredited investor definition is the single most important investor protection in the private market. Today’s amendments purport to ‘update’ that definition while leaving in place 38-year-old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors — the bulk of whom are seniors — going forward.
“With its actions today, the Commission continues a steady expansion of the private market, affording issuers of unregistered securities access to more and more investors without due regard for the risks they face, and without sufficient data or analysis to ensure that our policy choices are grounded in fact rather than supposition.”
In the wake of COVID-19, the SEC altered other regulations to temporarily allow the crowdfunding of established small business.