The SEC is considering an interesting change that could give more people access to private market investments.
For years, accredited investor status has largely been determined by income and net worth. Now, the SEC is considering whether financial knowledge and professional experience should also play a role.
First, what is an accredited investor?
Today, an individual generally qualifies by meeting one of the following:
• More than $1 million in net worth, excluding your primary residence
• More than $200,000 of annual income, or $300,000 jointly with a spouse or spousal equivalent, for each of the past two years with the expectation of reaching that level again this year
There are also existing professional credential pathways, including certain FINRA licenses.
The SEC is now considering adding several more.
What could change?
The SEC is seeking public comment on six potential new pathways.
Someone could potentially qualify by holding:
• A CPA license
• A CFA charter
• A CFP certification
• A FINRA Series 79 license
• A FINRA Series 86 or 87 license
Or, perhaps most interestingly, by passing a new FINRA accredited investor exam.
The proposed exam could be open to anyone age 18 or older. The current concept calls for approximately 75 multiple-choice questions, with about two hours to complete it.
The exam would focus on topics such as investment risks, financial statements, securities, disclosure requirements, conflicts of interest and private offering structures.
If ultimately approved, passing the exam could provide accredited investor status for 10 years.
Why does this matter?
The accredited investor definition determines who can participate in many private investment opportunities.
Historically, the rules have primarily used income and net worth as a way to determine whether someone has the financial sophistication to understand the risks involved.
The SEC is now considering another approach:
Could demonstrated financial knowledge be another way to qualify?
If these changes are ultimately adopted, someone who has developed significant investment knowledge and experience could potentially gain access to private market investments even if they do not meet the traditional income or net worth thresholds.
One important caveat
Nothing has changed yet.
The SEC is currently seeking public comment on these potential pathways. The existing accredited investor requirements remain in place.
Each proposal has a 60-day comment period beginning after publication in the Federal Register, so there is still a process to work through before any changes take effect.
I think this is an interesting development because it could broaden the definition of who is considered financially sophisticated enough to participate in private markets.
Instead of looking only at what someone has, the SEC is considering whether what someone knows should matter too.
I’ll be watching this one closely.