In a meeting of the Securities and Exchange Commission (SEC), Investor Advisory Committee (IAC), members approved recommendations pertaining to providing greater access to private securities for retail investors.
The IAC was established under the Dodd-Frank Act, which authorizes the Committee to make recommendations to the Commission as to how the regulation of markets can be improved to better serve investors. At a meeting yesterday, the Committee considered and voted on recommendations regarding the regulatory framework governing retail investors’ access to the fast-growing private securities marketplace.
While several exemptions allow retail participation, the largest private market is for issuers raising money under Reg D. This exemption is utilized by almost all promising early-stage firms before going public. This security exemption allows for an unlimited amount of funds to be raised, but only accepts Accredited Investors.
The Accredited Investor rule states that only individuals who earn over $200,000 per year ($300,000 if married) or have a net worth of over $ 1 million (not counting a primary residence). While there have been initiatives seeking to alter the rules to allow smaller investors to participate, so far, both Congress and the SEC have fallen short.
The IAC also noted that a lawsuit has been filed against the SEC, as the Accredited Investor rule which divides Americans into two classes: the wealthy and everyone else.
As previously reported, ICAN is seeking a change to the rule, claiming that it blocks entrepreneurs from seeking investors, impacting free speech while violating federal law, as “Congress never intended to discriminate and disenfranchise the population based on wealth.”
While everyone acknowledges that a wealth hurdle is not the most effective method for determining eligibility, neither the regulator nor the legislator has been able to update the rules to consider sophistication as a more suitable determinant.
In a voice vote, the IAC recommended that the SEC allow retail investors to participate in private markets via registered funds that are “broadly diversified.” There were multiple caveats to this recommendation, which could alter its effectiveness.
The recommendations were grudging as the IAC stated “the Committee does not take a position on the desirability of expanding retail investors’ access to private market assets in direct ways, but, if the SEC were to determine that such an expansion is warranted, the Committee firmly believes that certain basic investor protection guardrails should accompany it.”
This acceptance of a change is due to the shift in Administration, which is more investor-friendly, as well as the fact that the Republican-controlled Congress has several bills in the works that would compel the democratization of access to private markets.
The recommendations addressed the definition of an Accredited Investor, suggesting rigorous requirements such as limiting investment amounts and allowing certain credentialed individuals to be approved as Accredited. These credentials may be CFAs, CPAs, Wealth Advisors, etc. The IAC supported the notion of a test to determine sophistication, which FINRA would manage with feedback from state and federal regulators.
Commissioner Hester Peirce shared her opinion that her “preferred approach remains full access for all investors to the private markets.”
Peirce stated:
“Some people, when they think of retail investors in private markets, seem to see images of unsteady, unpracticed bikers careening down streets full of obstacles and danger. These people think training wheels and a firm parental hand are necessary to stabilize and, when appropriate, stop retail investors. That image is at odds with the picture I have after hearing from scores of retail investors who want to participate in the private markets. These people are smart, thoughtful, and educated—often self-educated. They understand that investing in private markets comes with unique risks, limited transparency, unpredictable returns, and limitations on liquidity. But they want to have the freedom to invest in the assets and markets they choose, and they resent the fact that private markets are the exclusive reserve of the wealthy. Their frustration has only grown with the expansion of the private markets.”
This discussion on the Accredited Investor rule is timely, as public markets have dwindled while private markets have boomed, with the majority of the population excluded from this key market. Peirce also cautioned against suggestions to add more compliance hurdles, which would increase the cost of pursuing private capital —a significant policy concern, as private markets fuel innovation, the economy, and wealth creation for all.
