Thoughts on the SEC's New Accredited Investor Rules

By: Scott Purcell
Published On: January 23rd, 2020

In another month, the amendments to the SEC's rules defining who qualifies as an "accredited investor" goes into effect. A lot of people have asked what I think about the new rules. The reason I haven't written about them yet is this..."yawn". 

Yes, the rules make some nice long overdue clean-up's. They recognize that not all people living together are man/wife, and now use "spousal equivalents" as the pooled standard. They recognize the existence of LLC's. They permit small ($5M+) family offices to be deemed as accredited. They expand on and clarify the definition Qualified Institutional Buyers for various types of wealthy entities. They now let insiders who work (in a management role) at hedge funds, and other types of private investment funds to invest in those funds (and not count them against the 100-person cap).

Beyond that, not much that actually helps entrepreneurs raise capital. And, even more sad, nothing that helps regular folks build wealth by investing in real estate projects, business start-ups, fast growing private businesses, or other non-public investments. Nope, it still remains policy that only rich people are permitted to get rich. Middle-class people, including highly educated individuals, are relegated to the public markets and doomed to financial mediocrity as the opportunities to invest in things that could produce good returns are kept from them by regulation.

The hope was that the SEC would expand the definition to include more people based upon education or professional qualifications. This would be in addition to the financial qualification standards that currently exist (and thankfully were not changed for the worse). But that did not happen.

"Professional Certifications and Designations and Other Credentials" This is a new category, and the one which held out the most hope. The SEC discussed the comments they received urging them to permit investors to be deemed "accredited" based upon their financial wherewithal. This was hoped to include CPA's, MBA's, and other standards. In the end, the SEC decided to keep the game in-house and is only expanding the rules to include registered securities representatives (specifically the Series 7, 65, and 82 securities licenses) and registered investment advisers. Everyone else is left out in the cold.

The SEC addresses this by saying "We acknowledge that there may be individuals that hold other professional or academic credentials that can demonstrate similar comprehension and sophistication; however, we believe that it is appropriate at this time to tailor this category of credentials and designations to certain ones that directly relate to securities and investing."

You have a PhD in economics from Princeton? Too bad, you aren't considered smart enough to invest in a real estate, hedge fund, venture fund, or a direct-to-the-crowd 506(c) offering.

The total universe of such people is 708,584. This in a country with a population of 327,200,000.

And many (perhaps most) of those people are already accredited per financial determinations anyhow. And those who aren't will likely be prevented by their firms and by FINRA rules from participating in most of these types of investments.

Now, at least the SEC left the door open for future rule makers to expand upon who qualifies with "professional certifications and other credentials" - "The proposed approach would provide the Commission with flexibility to reevaluate previously designated certifications, designations, or credentials if they change over time, and also to designate other certifications, designations, or credentials if new certifications, designations or credentials develop that meet the specified criteria." So that will depend upon the people in charge there at any given time. 

In summary, some nice cleanups but overall it's much ado about nothing and does not achieve the public interests of enhancing capital formation or enabling more of the middle class to participate in private markets.

Best,

Cheers,


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