Expert Takes: SEC Amends Accredited Investor Definition

Investing, News, Opinion | September 1, 2020 By:

The US Securities and Exchange Commission (SEC) has recently amended its “accredited investor” definition to allow investors to qualify based on defined measures of professional knowledge, experience or certifications, in addition to the existing tests for income or net worth.

The regulator’s previous definition of “accredited investor” limited private capital market participation to investors who met specific income or net worth tests.

The amended definition provides eligibility to investors who don’t pass the existing tests for income or net worth but meet defined measures of professional knowledge, experience, or certifications. Holders of SEC Series 7, Series 65, and Series 82 licenses now qualify as accredited investors, and the SEC said members of the public may wish to propose additional certifications, designations, or credentials that satisfy the attributes set out in the new rule.

According to the SEC, the amendments to the accredited investor definition in Rule 501(a):

  • add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials, including the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. (The Commission will reevaluate or add certifications, designations or credentials in the future);
  • include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
  • clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs);
  • add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries;
  • 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.

Some experts in the FinTech space have shared their perspective on the significance of the change and how this affects investments into crypto, specifically registered securities offerings for digital assets and DAOs.

Jackson Mueller, Director of Policy and Government Affairs at Securrency:

“The SEC’s decision to amend the accredited investor definition is important for two reasons, which I believe send a positive signal to the digital assets space. First, the SEC has once again shown to the market its willingness to reassess longstanding precedent to spur capital formation and broaden the investor base in a responsible manner. Second, the broadening of this definition and, as a result, the pool of accredited investors, dovetails perfectly with the benefits of digitalization of financial instruments. The administrative efficiency and more streamlined and widespread means of distribution of digital assets will make it easier for issuers and broker-dealers to market private assets in a  compliant manner to these investors. These changes are the culmination of a disciplined process undertaken by the SEC. The Commission took its time to ensure that its three-part mission is not put at risk. Such an approach is critical to the development of a mature digital assets marketplace.”

Seamus Donoghue, VP Sales and Business Development at METACO:

“Banks face a number of hurdles when deciding to get involved in crypto and digital asset markets. The first being regulatory, despite the fragmented regulatory landscape for crypto in the US the OCC recently opened the door to banks becoming custodians. With potentially one of the biggest hurdles falling the business case for the bank to get involved is obviously the next critical hurdle and this requires understanding the addressable market ie. who are the potential investors for crypto and tokenized securities and how big is the market. The market cap of cryptos for cryptos is clear but if we start looking at tokenized securities, and investors are limited only to those individuals with assets in excess of 1 million, excluding the value of their house, then the business case becomes much more challenging given that it is estimated only 10% of US households would qualify as accredited investors according to the Federal Reserve. The sector although it has a promising future is still emerging and secondary liquidity and issuer quality is still relatively poor – precisely because the small potential investor base has clearly hampered market development. The SEC has potentially blown the doors off market access if qualified investors are no longer measured by a minimum of liquid financial assets but can be designated “qualified” by market knowledge, education or professional designation. The devil will be in the detail as to how exactly they articulate this new definition but it is a move in the right direction. The changes by the SEC should increase the pool of available investors and could help, along with the OCC’s announcement to solidify the business case for banks deciding if they should join the journey into cryptocurrencies and digital assets.”

Luciano Nonnis, CEO and Founder at DXone:

“The SEC is modernizing their accredited investor definition because governments are trying to open up access to professional markets. This seems designed to increase interest in initial public offerings and the secondary market for securities.

In this day and age, as long as we educate potential investors, why would we prevent someone from investing in a company, if they understand and are willing to take the risk?

The definition of accredited investor based on one’s wealth is unsound, for people with money need to be protected, too. Many people have inherited wealth or earned lots of money without a sophisticated knowledge on how to analyze companies and invest. They could lose everything with just one investment.

It also won’t be easy to evaluate one’s knowledge and expertise in these topics. In spite of that, people can still participate in these markets––regardless of their financial sophistication––through brokers who manage complex instruments, such as derivatives, options, futures, etc., on an individual’s behalf. Brokers offer these complex and risky assets to non-accredited investors. Yet, one is not allowed to invest directly in an early stage company. It can be just as risky betting on the price of, say, a derivative as it can be investing in a project with a good business model or powerful idea.”

Dave Hodgson, Chief Investment Officer, NEM Group & Managing Director of NEM Ventures:

“It is good to see the SEC making moves towards allowing more individuals to make their own decisions with their own money. The move appears positive but without comment on which credentials are required to be considered intelligent enough to manage your own funds, it is hard to know how wide the change is. If they stopped telling others what they can and can’t invest in and instead educated retail investors about risk management without forcing it upon them, that may be an even more significant movement, but one step at a time.”