The Securities and Exchange Commission wants to make it easier to become a sophisticated investor.
The term is, technically, “accredited investor,” and currently, it translates roughly to “rich.”
Since the agency’s crackdown on ICOs, accredited investors have been a primary way to raise money in the cryptocurrency market. Under the Securities Act of 1933’s Regulation D, it is far easier to sell securities to individuals and businesses that meet this standard.
The problem with “accredited investors” that the agency feels it needs to solve is summed up nicely in a Dec. 18 statement by the ever-quotable Commissioner Hester Peirce, also known as “Crypto Mom” for her industry advocacy.
“Our current definition includes investors that spend their days cruising around in a Ferrari that Daddy bought them, yet excludes investors whose weeks are spent earning money and weekends are spent figuring out how best to invest it,” said Peirce.
The notably less quotable SEC chairman, Jay Clayton, agreed with Peirce.
“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” he said in the announcement of the proposed rule change. “Modernization of this approach is long overdue.”
Knowledge talks, money shouts
Money would remain an invitation to the party, of course. In addition to the current rules, any ”entity” with $5 million in investments would qualify. This would include wealthy family offices, limited liability companies, and registered financial advisors. So would “knowledgeable employees” of investment funds, among others.
Currently accreditation requires an income of at least $200,000 (or $300,000 with a spouse) for two consecutive years. So does a net worth of at least $1 million, excluding the home.
Which doesn’t mean anyone with a trading account on Binance will be able to get in on the action.
Ability to participate in the private capital markets should be based on “established, clear measures of financial sophistication,” to qualify, said Clayton.
An attached fact sheet said, “the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications.”
Who’s not a sophisticated investor?
Commissioner Elad Roisman was particularly vehement—and perhaps a little bitter—on this point. After all, he does not qualify as an accredited, sophisticated investor.
“I am one of five votes every time the SEC decides to bring charges against a company,” he said. “One might think I would be capable of understanding the risks of a private investment opportunity and recognize the information I would need to make an informed decision.”
Commissioner Allison Herran Lee, on the other hand, called the proposed rule changes dangerously “over-inclusive.” They would capture “investors with little to no ability to assess or bear the risks of private offerings,” she said. Saving $200 a month at 7% over 50 years gets you past the $1 million barrier, she pointed out.
Commissioner Robert Jackson Jr., a Trump appointee, agreed with Lee. His focus was on the potential for fraud.
Brokers directing clients to private securities are two to three times as “likely to be the subject of both customer complaints related to sales practices and regulatory inquiries about misconduct,” he said. “[I]t’s far from clear why we should expose even more investors to those risks.”