SEC has recently announced that it is planning to expand the definition of ‘accredited investor’. This step further allows a broad group of investors to participate in regulated financial instruments.
SEC is planning to widen the scope of an ‘accredited investor’- the one who is eligible to participate in private capital markets. In other words, the Security and Exchange Commission of the United States is planning to draw a proposal that broadens the bracket of investors.
In a press release announced on its website, the commission has added new criteria for eligibility to become an accredited investor. At present, the eligibility is restricted to individuals with $1 million in net worth, (or who earn more than $200,000 per year), an organization with more than $5 million in assets, banks, and institutions which meet certain legal definitions or entities that match certain other restricted terms.
The New Definition in Place
As per the press release, the new proposal is meant to increase the range of ‘institutional and individual investors’. Furthermore, it classifies these investors with those having the knowledge and expertise in capital markets.
A concept paper was issued earlier this year, in an effort to improve the existing offering framework. In the same paper, the commission requested public and other committee views for possible approaches to accredited investors. After carefully examining the different viewpoints, the commission has now taken final steps to amendments in the investor definition.
Eligibility Criteria Under Accredited Investor
The new proposal has added the category of ‘natural persons’. This includes people with professional knowledge, certifications, and experience. Further, a new category for entity owning in excess of $5 million in investments is also specified.
Additionally, limited liability companies and registered investment advisers that meet pre-defined conditions would also qualify under this new scheme.
The new accredited investor definition also includes Indian tribes owning investments exceeding $5 million. The commission also includes ‘family offices’ with more than $5 million in assets under accredited investor definition.
Widening the Definition
The Securities and Exchange Commission chairman, Jay Clayton, has stated that the current definition rather takes a binary approach. In the press release, he stated that
“Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication”
He also explains that the new definition allows a rather inclusive approach with organizations such as tribal governments can also participate in private capital markets.
Concluding the press release, the officials have stated that the proposal will be subject to a 60-day public comment period.