Hedge Funds, Startups Can Court More Investors in SEC Plan (1)

Aug. 26, 2020, 2:14 PM

The U.S. Securities and Exchange Commission is easing restrictions that prevent most people from investing in hedge funds and hot startups.

Holders of professional certifications -- like Series 7 licenses that authorize individuals to sell securities -- will be eligible to invest in riskier assets under rule changes the regulator announced Wednesday. The revamp is focused on allowing those with financial expertise to put their money in private investments that don’t trade on public exchanges even if they fail to meet existing net worth and income restrictions.

The SEC said in a statement that the changes are meant to make it easier for firms to raise capital and “more effectively identify institutional and individual investors that have the knowledge and expertise to participate” in those offerings.

“Today’s amendments are the product of years of effort by the Commission and its staff to consider and analyze approaches to revising the accredited investor definition,” SEC Chairman Jay Clayton said in a statement. “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.”

The changes, which were first proposed in December, adjust the SEC’s “accredited investor” standard. The policy has generally kept investors out of hedge funds, fast-growing technology companies that haven’t gone public and private equity funds unless they have a net worth of $1 million or higher and annual salaries of at least $200,000.

The SEC’s two Democratic commissioners voted against the revamp, arguing that by failing to update the net worth and compensation requirements for inflation, the regulator missed an opportunity to protect many unsophisticated investors from putting their money in potentially dangerous assets. Commissioners Allison Lee and Caroline Crenshaw, in a joint statement, said the 38-year-old thresholds hardly mean the same thing in today’s dollars.

“The failure to update the thresholds thus far has resulted in an increase of 550% in qualifying households since 1983,” Lee and Crenshaw said. “With its actions today, the commission continues a steady expansion of the private market, affording issuers of unregistered securities access to more and more investors without due regard for the risks they face.”

Key Details

  • The rules also expand the definition of accredited investors to potentially include “knowledgeable employees” of investment funds and limited liability companies with $5 million in assets.
  • Groups such as Indian tribes, government bodies and foreign entities with more than $5 million in other investments would also be included.
  • The move is that latest by Clayton, a political independent appointed by President Donald Trump, to open up private markets to more investors.
  • The changes will take effect 60 days after they are published in the Federal Register, the SEC said.

Get More

  • Hedge Funds, Unicorns May Open to More Investors in SEC Plan

(Updates with statement from Democratic commissioners, starting in sixth paragraph.)

--With assistance from Robert Schmidt.

To contact the reporter on this story:
Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story:
Jesse Westbrook at jwestbrook1@bloomberg.net

Gregory Mott

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