SEC Proposes Expanding Access to Private Capital Markets

On Wednesday, the U.S. Securities and Exchange Commission (SEC) said it is proposing changes to the definitions of "accredited investor" and "qualified institutional buyer." That could open up the private markets to individual investors who have traditionally been shut out of that marketplace due to higher investing and income thresholds.

Accredited investors are those considered knowledgeable, experienced and rich enough to invest in securities not registered with the SEC. Regulators believe these investors do not require the additional protection they provide and can absorb big losses. At present there are two ways individuals can qualify – if their income was over $200,000 (or $300,000 together with a spouse) in each of the last two years and they reasonably expect the same for the current year, or if they have a net worth over $1 million, either alone or together with a spouse (excluding the value of their primary residence). This definition hasn't been updated since 1982 besides a small change in requirements in 2010 under the Dodd-Frank Act, which was the exclusion of the value of a person’s home from net worth calculations.

The agency said the amendments would create new categories for individual investors based on professional knowledge, experience, or certifications. In addition to this, limited liability companies and Rural Business Investment Companies (RBIC) would be eligible for qualified institutional buyer status if they manage at least $100 million in securities.

"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," said SEC Chair Jay Clayton. "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."

The "accredited investor" definition has been criticized in the past for not optimally assessing a person's financial sophistication. Experts have said net worth is a poor measure of expertise and the definition also shuts out those with financial professional credentials who don't earn enough.  

The matter of who gets to participate in private capital markets is especially important now as companies stay private for much longer than they used to and the number of public companies has been falling since the mid-90s. The chart below from the Federal Reserve Bank of St. Louis shows the number of listed domestic companies in the U.S. over time.

The SEC will accept comments from the public about the proposal over the next 60 days.