It’s no longer just income or net worth. Based on their financial knowledge and experience, retail investors may also invest in “alternative investments.”

The SEC on Wednesday amended its definition of “accredited investor,” a term that drew a line between high-earning, deep-pocketed investors and retail investors for access to often lucrative opportunities in the private capital markets. Also known as “alternative investments,” these markets include, for example, venture capital, hedge funds, private equity, and real estate. (Think Advisor)

Accredited Investor

The SEC amended the definition of the term to include measures of professional knowledge, experience, or certifications or licenses such as from the Financial Industry Regulatory Authority.

SEC Chairman Jay Clayton, in a statement:

“The Commission’s use of income or wealth as the exclusive proxy for an individual’s financial sophistication and ability to assess and bear risk has long been unsatisfactory. Individual investors who do not meet the wealth tests, but who clearly are financially sophisticated enough to understand the risks of participating in unregistered offerings, are denied the opportunity to invest in our private markets. For example, using only a binary test for wealth disadvantages otherwise financially sophisticated Americans living in lower-income/cost-of-living areas.”

The SEC rules have so far defined an accredited investor as someone who earns annually more than $200,000 (for the past two years) or more than $300,000 including spouse income. In terms of assets or net worth, the threshold was individual or combined wealth of $1 million, not counting the value of the home.

Clayton added:

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”

The “exclusionary” definition of accredited investor irked retail investors

The rule was meant to protect retail investors from risky and complex investments in the private markets. However, such investors have increasingly begun to chafe at the restriction.

SEC Commissioner Hester M Peirce echoed these sentiments in a statement:

“Why shouldn’t mom and pop retail investors be allowed to invest in private offerings?  Why should I, as a regulator, decide what other Americans do with their money?  The alleged justification is investor protection: people can’t lose their money on investments if they aren’t allowed to invest.  Yes, that is true, but where does that principle take us?  Someone who does not invest at all will not lose any money on investments.  She will, however, lose.  She will lose the opportunity to see her money grow more than it could by sitting in a bank account.  And, she will lose the opportunity to be part of enterprises that she believes will transform society.  She will lose her right to make decisions for herself.”

Two Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw voted against the changes to the definition of accredited investor.

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