Throughout the course of 2020, the US Securities and Exchange Commission (SEC) has had its hands full. Not only has the regulatory body taken various companies to task on past actions but it has also put forth an effort to stimulate investment markets. These efforts have been made evident through various proposals for amendments to existing rules and definitions.
The New ‘Accredited Investor'
The former definition of an accredited investor was a message that you need money to make money; for individuals, their net worth had to be over USD$1M and/or annual income over USD$200k. With the new changes to accredited investors, the SEC has decided to place an increased emphasis on ‘financial sophistication' as a factor that determines your eligibility to invest as an accredited investor, in addition to the former requirements still being applicable. SEC Chairman Jay Clayton remarked, “for the first time, individuals will be permitted 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.”
In order for one to prove their ‘financial sophistication’, the SEC will be looking at various things – each of which must be sufficiently proven by the investor.
- Professional knowledge
By focusing on these investor traits, and not solely net worth, a significant number of investors, previously excluded, will fit the new definition.
In addition to broadening the definition with regards to individual investors, the SEC has also decided to include various new entities under its scope. The following are simply a few of these new amendments provided by the SEC,
- add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
While these changes are very welcome and will make investing more inclusive for some people, many Americans will still be unable to invest if they do not meet the monetary, experience, or educational requirements. The significant hurdles to investing are partly what has driven the rise of the crypto market; lower barriers of entry have allowed people who would not meet the accredited investor definition (even the new definition) to invest in startups that otherwise would never have been accessible to them. Unfortunately, because the SEC refuses to regulate the crypto space, these investors continue to invest in risky crypto startups because this is one of the very few investment options for start ups that is available to them.
The amendments to ‘accredited investor' are just one approach that the SEC is taking to modernize its approach to capital markets.
Prior to COVID-19 becoming the life-altering pandemic that it is, the SEC saw the merits of crowdfunding. It is no secret that equity crowdfunding is quickly growing in popularity, with various companies having noted significant upticks in investor participation, as the world figures out a way forward post-pandemic. As such, the SEC made the decision to amend rules surrounding prospectus exemptions, hoping to grant easier access to capital for young start-ups.
In this proposal, restrictions on crowdfunding platforms would be loosened, primarily by raising monetary limits of crowdfunded capital generation events. When first put forth by the SEC, we took a closer look at what these changes meant, and whether excitement was warranted.
Securities and Exchange Commission
The SEC is a United States based regulatory body. Tasked with fostering fair and transparent markets, the SEC is responsible for the creation, and enforcement of regulations surrounding assets deemed securities.
In Other News
Although the relationship between the SEC and the world of blockchain may be strained at times, there is a notable figure within its ranks known to be accepting of the technology – Commissioner Hester Peirce.
Not only have we been fortunate to have had the opportunity to interview Commissioner Peirce in the past, but we recently covered news of her re-election for a second term at the SEC. With this re-election, we hope and expect to see more progress made surrounding the treatment of blockchain based endeavours.