US ‘accredited investor’ definition expanded; what this means for private markets
The U.S. Securities and Exchange Commission (SEC) has updated its guidance on what it means to be an ‘accredited investor’, widening the criteria to include investors who previously would not have qualified. This change is a significant move from the regulator that effectively enables a greater number of investors to access private capital markets in the US. So what does this mean for private markets in the US and what will be the impact internationally?
Investor profiling in the US
The main purpose of the SEC is to protect investors whilst maintaining fair and efficient markets that facilitate capital formation. In keeping with this mission, federal securities laws state that only those investors who are deemed ‘accredited’ may participate in certain securities offerings. A key reason for this level of protection is to ensure that all participating investors are financially able to sustain the risk of loss.
Historically, in order to be considered an ‘accredited investor’, an individual needed to have earned an income that exceeded $200,000 for the past two years (or $300,000 when combined with a spouse’s income), or they needed to have a net worth (excluding the value of their primary residence) of over $1m, either individually or combined.
This recent revision to the guidance widens this net to include those that do not necessarily have these significant financial foundations.
In a statement released directly by the SEC, their Chairman, Jay Clayton said that “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations, that may qualify to participate in certain private offerings.”
These changes mean that in order to be considered an ‘accredited investor’, individuals now have an additional set of defined measures, which go beyond the constraints of their income and/or worth, which they can strive to meet. These additional measures include professional knowledge, experience and certifications, all of which expand the list of parties that can now qualify as investors.
As well as this, the expansion now also allows individuals who are ‘knowledgeable employees’ of the fund, limited liability companies (with $5m in assets), family offices (also with at least $5m in assets), and spousal equivalents to be considered ‘accredited investors’.
What does this mean for private markets in the US (and internationally)?
The most obvious change to face the US private markets is the fact that the revisions will now allow for more investors to participate in private offerings, making private markets more accessible to a wider audience. This in turn will hopefully provide some much-needed financial support to the ecosystem of start-ups and scale-ups that are feeling the effects of the looming recession.
This addition of experience/sophistication in the US definition of an ‘accredited investor’ brings it in line with UK thinking where these factors are considered; see the UK definitions of ‘professional clients’ and ‘certified sophisticated investors’.
The amendments align to what is being seen across the industry; a general shift change in investor attitudes as they increasingly demand access to private markets and investments that require a more long-term view of return. More and more individuals are seeking to move away from traditional investment strategies as the volatility of the public stock market becomes more apparent. This search for stability, and often exclusivity, naturally leads investors to the private domain.
It may be some time before we see the full effects of these changes on the US private markets, but financial firms should ultimately be viewing these revisions as a signal to begin evaluating their service offering to ensure that they are able to cater for the needs of their clients; providing them with access to these new opportunities. Digitization is key in this respect. The only way that financial firms are going to be able to stay ahead of the curve is by utilising technology in order to take away the time-consuming burdens of manual governance processes and ensuring that they avoid regulatory enforcement and financial penalties as they scale their private markets propositions.