The SEC’s new proposal could change private investments forever
Jan 07, 2020 Last year, the Securities and Exchange Commission (SEC) proposed amendments to the definition of “accredited investor” and the definition of “qualified institutional buyer” that would expand the list of people and institutions currently capable of investing in the private capital markets. That may impact asset valuations and liquidity for family office and institutional assets across the board.
At the moment, an individual needs to prove she has $1 million in liquid assets or earn more than $200,000 in annual income to be accredited. Firms need at least $5 million in assets under management (AUM) to qualify. Once accredited, these investors can take advantage of private opportunities such as leveraged loans, mortgage-backed securities, startup equity and private real estate deals.
The new rules would expand the accreditation to “knowledgeable” individuals such as stockbrokers, family offices or their family clients with a combined $5 million in AUM, spousal equivalents that can pool their assets, and limited liability companies with over $100 million in securities owned.
If implemented, these updated rules would align the domestic private market with other financial centres such as Canada, Israel and the European Union. In Israel, licensed investment advisers and exchange members can skip the networth requirement and become accredited. in Europe, however, individuals who do not meet the networth requirement (€500,000) must prove they have at least one year of professional experience in the financial industry and have completed sizable investment tractions over the past four quarters, according to the Markets in Financial Instruments Directive (MiFID) regulations.
The new rules were welcomed by experts who believe the net impact of these changes could be positive for the market. Greater flexibility for accreditation “would increase investment opportunities for millions of Americans, while expanding the pool of capital to which entrepreneurs can appeal for funding,” says John Berlau, a senior fellow at the Competitive Enterprise Institute, in an article published on Forbes.
In an economic assessment of the proposal, the SEC claimed thousands of new investors could be added to the private markets, which could ultimately “make unregistered offerings more attractive to certain issuers and particularly facilitate small business capital formation.”