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US regulator votes to give more investors access to private markets

Wall Street's top regulator has taken a key step toward opening up the private markets to more investors.

By a 3-2 vote, the SEC green-lighted a proposal Dec. 18 that would expand the definition of an accredited investor beyond the wealthy individuals and large institutions the term currently covers. The proposed changes would allow individuals with a high level of financial sophistication, as well as some other groups, to invest in privately held big-name unicorns or hedge funds, even if they do not meet the SEC's financial thresholds for an accredited investor.

"The current test for individual accredited investor status takes a binary approach to who does and does not qualify based on a person's income or net worth," SEC Chairman Jay Clayton, who voted in favor of the proposal, said in a statement. "Modernization of this approach is long overdue."

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Under Chairman Jay Clayton's direction, the SEC has proposed expanding the accredited investor definition to allow more individuals and institutions with opportunities to invest in the private markets.
Source: Associated Press

Under its current rules, the SEC deems an individual to be an accredited investor if they have a net worth of at least $1 million, not including the value of their primary home; an annual income that has exceeded $200,000 in each of the last two years; or a combined annual income of $300,000 between themselves and their spouse. That framework has led to an estimated 16 million households in the U.S. qualifying as accredited investors today.

The SEC is not amending those financial and wealth standards. Instead, the agency has floated the idea of allowing individuals who hold certain financial certifications such as Series 7, 65 or 82 licenses but do not meet the financial thresholds to still qualify as accredited investors. As for institutional accredited investors, the SEC has proposed to allow some limited liability companies, registered investment advisers, rural business investment companies and family offices, among others, to fall under the newly expanded definition.

The vote came after years of Wall Street institutions, private company executives and others lobbying the SEC to expand its accredited investor definition.

By doing so, the SEC will ease its restrictions on investing in private companies that have yet to hit the public market. That means more investors will have access to tap into the surging valuations that private companies are seeing before they go public. But those offerings also carry risk in that private companies do not have to follow the same disclosure regime that publicly traded institutions do in the U.S.

Clayton has spoken at lengths in recent months about opening up the private markets to more investors, even suggesting a mutual fund-like model that would then invest in private companies.

"One of the things I like in our public markets is Main Street investors, they invest right alongside the institutions," Clayton recently said at a CNBC conference. "Can we replicate that in our private markets?"

Not every member of the SEC's top panel agreed about the changes, though.

"This release does not take seriously the investor protection concerns present in the private markets," said Commissioner Robert Jackson Jr., one of the Democratic officials at the agency who dissented on the vote. "The release before us today includes virtually no analysis of the costs of expanding eligibility to participate in exempt offerings. This kind of one-sided assessment of difficult choices serves no one, especially not investors."

Jackson highlighted an analysis that his office recently conducted, which found that brokers who place investors into private securities are "unusually" more likely to have faced customer complaints over sales practices and regulatory inquiries about misconduct than their peers who do not offer access to such offerings.

However, Commissioner Elad Roisman, a Republican, expressed concern that the regulator's proposed changes did not go far enough. Roisman specifically cited the fact that he and many other SEC officials do not meet the current or proposed financial thresholds to qualify as accredited investors.

"Based on this outcome, I wonder whether we have missed the mark," Roisman said. "Of course, not every private company will turn out to be a good investment, just as not every public company would be a good investment. But depriving people of investment opportunities based on certain income and wealth thresholds objectively makes little sense."