More individual investors would be eligible to participate in private markets under a new definition of accredited investor that the Securities and Exchange Commission voted 3-2 Wednesday to propose.
The proposal, based on SEC staff recommendations, would add categories of who could qualify as accredited investors based on their professional knowledge, experience or certifications, or whether they meet an investments test, as well as knowledgeable employees of private funds. There is also a "catch-all" category for any entity owning more than $5 million in investments, and limited liability companies are eligible if they meet a $100 million investment threshold.
The proposed change will first have a 60-day public comment period before it advances.
"The current rules use wealth as a proxy for sophistication and it appears that the commission is amenable to considering additional ways to measure that sophistication to make these investments," said Ricardo Davidovich, a partner with Haynes and Boone LLP's investment management group in New York.
The U.S. Chamber of Commerce welcomed the move, which it said in a statement will allow ordinary investors to share in the most dramatic growth opportunities, and further increase access to capital for startups and growing companies.
The change was welcomed by SEC Chairman Jay Clayton, who said an updated definition "is long overdue" and an important step in the SEC's efforts to allow Main Street investors to participate in private capital markets "on substantially the same terms as those that would be available to institutional investors with protections — including alignment of interest between individuals and institutions, and transparency — that are akin to the protections in our public market."
Mr. Clayton said he expected more details to come, as the commission looks into whether appropriately structured funds can facilitate that access, "particularly as a component of an investment portfolio that is analogous to the portfolio of a well-managed pension fund."
Commissioner Elad Roisman, a Republican voting for the change, struck a more cautious note at the meeting, saying that while it addresses the SEC's missions of protecting investors and facilitating capital formation, "I believe there is more we can learn from commenters and more we should deliberate before we consider adopting the staff's recommendations as presented."
The two Democrats on the commission dissented, with Commissioner Allison Lee worrying that it expands the pool of investors "in the opaque and indisputably high-risk private markets," while Commissioner Rob Jackson Jr. said it "does not take seriously the investor protection concerns present in private markets." The subject "requires further data-driven analysis of the risk of fraud in private offerings," including the risk of broker misconduct, Mr. Jackson said before voting.
