A divided SEC has voted to widen definitions of accredited investors in another step that proponents hope will bring more retail investors into the private capital markets.
The rule passed 3-2 over objections by Democratic Commissioners Allison Herren Lee and Caroline Crenshaw who made her Commission debut at the SEC’s August 26 open meeting.
It defines family offices (and family clients) with at least $5 million in assets under management, financial professionals who have Series 7, 65 or 82 licenses and “knowledgeable employees” of private funds as accredited investors. It also opens the door to possibilities that LLCs with $5 million or more in assets, as well as SEC- or state-registered IAs, exempt reporting advisers or rural business investment companies can all be considered accredited, too.
Arm me with harmony
It’s another victory for Commission chairman Jay Clayton and proponents of “harmonization” between Main Street and private markets. In their belief, rules designed to protect ordinary investors from high-risk schemes have locked them out of the most robust and dynamic part of the world economy.
“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,” Clayton said in a statement announcing the new rules. “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.”
Proponents of the Commission’s new accredited investor rules stressed how tentative the August 26 measures were.
“These newly minted accredited investors are not your typical mom-and-pop retail investors, a fact that should assuage the concerns of those that fear any expansion of the definition,” Republican Commissioner Hester Peirce said in announcing her support for the rules. “It does not assuage my concerns. 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?”
In a joint statement, Lee and Crenshaw condemned the new definitions, focusing most of their scorn on the decision not to tie wealth thresholds to inflation.
“Instead,” they said, “the release merely states that indexing going forward would ‘reduce the potential aggregate capital supply available for exempt offerings going forward.’ That capital supply, however, is hardly in danger.”
The Democrats also reject arguments, made in the Commission’s adopting release, that ordinary investors will be protected from private markets volatility in part because the average customer has so much more access to information now.
“This ignores the naturally opaque nature of the private market where issuers are not required to provide the robust disclosures that are features of public offerings. No matter how powerful your computer is, you cannot access information that is not there,” their statement said.