"Wealth is a crude measure of a person’s ability to make financial decisions,” resulting in “a system [which is] fundamentally unfair, unequal, and unjustified.” - Elad Roisman, SEC Commissioner
On August 26, 2020, the SEC announced their final ruling to expand the definition of "Accredited Investor", which identifies who is eligible to invest in the private capital market. Until now, the government only allowed individuals with annual income of $200,000 or net worth of $1 million, and certain institutions, to purchase securities outside of public offerings. For over three decades, no matter a person's knowledge or access, if they were not already wealthy, the US government determined that they were not fit investors.
The high net worth requirement was touted as a safe way to protect investors from the volatile private market, operating with the logical fallacy that wealthy people are the most educated and equipped and therefore are allowed. This is a blindingly clear example of the structural barriers that prevent free enterprise for all people. People of Color, 2nd and 3rd world immigrants, women, and stay-at-home spouses, have been significantly absent, and some may observe, systematically barred.
For example, the net worth of a typical American white family was $171,000 in 2016.
For the typical Black American family, the net worth was $17,150 - nearly ten times lower than their counterparts. (Check out Brooking's Institution's Research in "Examining the Black-White Wealth Gap")
"Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets."
The Pre-IPO market continues to expand, and is the star of the Alternative Investments asset class. Now that the SEC is allowing more market participants, including previously restricted entities like tribal organizations, we will get to see how diversifying the investor customer changes the private equity market.
SEC 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.
Check out the SEC Press Release : https://www.sec.gov/news/press-release/2020-191
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