When regulators seek to protect investors from risk, they often end up simply putting legitimate opportunities out of bounds. In one now infamous example from 1980, Massachusetts regulators declared a certain IPO “too risky” and prohibited participation by state residents. But Apple’s IPO turned out to be a decent investment opportunity after all.
Similar paternalistic thinking gave rise to the SEC’s “accredited investor” restrictions, which prevent people of modest means from participating in certain investments. The SEC appears poised to ease those restrictions.
According to a report issued by the SEC, for decades the SEC has permitted “accredited investors” with sufficient income and assets to “participate in investment opportunities that are generally not available to nonaccredited investors, such as investments in private companies and offerings made by hedge funds, private equity funds and venture capital funds.”
According to that same SEC report, “issuers using these exemptions raised over $1.3 trillion in 2014 alone.” That’s a lot of opportunity to deny to everyone who makes less than $200,000 per year ($300,000 for married couples) or who have a net worth of less than $1 million, the current thresholds for “accredited investors.”
Reform has been in the air since at least 2010 when a provision in Dodd-Frank directed the SEC to review the rule to determine whether it should be modified or adjusted. The initial modification, in 2011, denied investment opportunities to a greater number of people by excluding the value of a person’s primary residence for purposes of determining whether the person’s net worth exceeded $1 million.
However, following the change in administration and nomination of Jay Clayton to head the SEC, it did not take great prescience to suggest that the “accredited investor” reform effort would pick up steam. When asked about possible changes that Clayton might pursue, some commenters pointed to the issue as likely to appear on the new SEC agenda.