Changing the Rules
In a somewhat surprising and positive move, the Securities and Exchange Commission (SEC) have divulged that they are considering amending existing securities laws. The purpose of this is to better reflect the modern investor.
In their announcement, the SEC stated,
“The proposed amendments would allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications.”
Being deemed an accredited investor results in a significant amount of doors being opened. The vast majority of high-potential investing opportunities are geared towards this subset of investors, due to regulatory restrictions.
Unfortunately, the current definition bases one’s eligibility on their income and/or net worth. This restrictive nature is one reason why crowdfunding platforms, such as WeFunder, have experienced high levels of adoption in recent years.
While still retaining certain financial requirements to become an accredited investor, the new changes will potentially open a lot of doors, as the process places a heavier emphasis on determining if the investor is ‘knowledgeable’.
The following is an excerpt, elaborating on the six amendments brought forth by the SEC for public commentary over the next 60 days.
- add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
- with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund;
- add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors;
- add a new category for any entity, including Indian tribes, owning “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.
An Industry Plea
This move is one that has been years in the making. Industry pundits have been stating the need for an updated definition in a vocal way, for a good while now.
As the saying goes, ‘the squeaky wheel gets the grease’. If enough people speak up, and continue to do so, change will be affected. This was made evident in 2012, with the passing of the JOBs Act (which paved the way for current day crowdfunding platforms), and it is being made evident again now.
While this move was not made solely with digital securities in mind, the high potential – yet nascent industry – stands to greatly benefit. Already a niche market, due to its infancy and heavy handed restrictions, such as the existing definition surrounding what is an accredited investor, makes digital securities even more niche.
One of the main areas holding back STOs from mainstream adoption is a simple one – accessibility. By broadening who is eligible to be an accredited investor, this hurdle will immediately be greatly lowered.
Upon filing the proposal, SEC Chairman, Jay Clayton, took the time to share a few words on the move. He stated,
“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth…Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
Many have viewed current definitions as being structured to support the phrase ‘the rich get richer’. To restrict one’s access to investment opportunities, strictly based on current wealth, is an antiquated way of ensuring investor safety. The Chairman’s recognition of this, by proposing more knowledge based criteria, is sure to be met with enthusiasm by many.
The Securities and Exchange Commission (SEC), is a government sanctioned entity. They are tasked with creating, and enforcing, compliance of rules surrounding the utilization of securities. The goal of these responsibilities is to ensure that surrounding markets remain safe, fair, and transparent for all participants.
Chairman, Jay Clayton, currently oversees operations at the SEC.
In Other News
In the past, we have reported on various instances of companies requesting that the SEC update their terms and definitions. These requests have come on various fronts, not just regarding the definition of an accredited investor. The following article is an example of this, as Templum took the lead earlier this year in requesting clarification.