More retail investors will be gaining access to private funds and companies with new rules approved by the Securities and Exchange Commission today.

For the first time, persons who don’t meet minimum levels of income and net worth in the ‘accredited investor definition’ will be allowed to put their money in private funds if they have certain professional certifications and designations and other credentials from accredited educational institutions.

“The change in the definition will provide clearly sophisticated individual investors with more opportunities to invest and to diversify their investment portfolios,” lauded SEC Chairman Jay Clayton.

The initial certifications allowed are include the Financial Industry Regulatory Authority (FINRA) Licensed General Securities Representative, Licensed Investment Adviser Representative but the Commission is allowed to expand the designations eligible for private funds investments.

“There is no doubt persons who have successfully obtained these certifications – and maintained them in good standing – are sufficiently financially sophisticated to participate in the private markets,” the SEC Chairman asserted.

Fund employees will also be eligible to invest in their particular funds.

Currently only people with $1 million in net worth (excluding the value of their principal residences or income of at least $200,000 for the last two years ($300,000) if married are allowed to invest in private funds.

The income and wealth tests are not changed. Without it, the number of households eligible to invest in private funds has risen by 550 percent since 1983.

In addition to giving more people the opportunity, Clayton said increasing the pool will allow smaller and early stage businesses in regions without large numbers of wealthy people to raise money easier.

He added by eliminating the wealth test-only to invest in private funds will particularly aid minority and women owned businesses.

Fellow Republican Commissioner Hester Peirce said the Commission should have gone further in expanding the number of persons allowed to invest in private funds and let mom and pop retail investors into the pool.

The other Republican SEC Commissioner Elad Roisman called the Commission’s actions “first steps” in increasing the number of people allowed to invest in private funds.

Roisman said increasing the monetary limits would only entrench the fallacy that there is magic in income and wealth requirements

He explained private market opportunities can range from investing in a new restaurant to buying stakes in private equity, hedge funds, or potential unicorn companies when they are in their infancy.

In a joint statement, the Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw faulted the expansion for failing to give the new potential private fund investors knowledge of the risks they could face.

They warned seniors are especially vulnerable to the risks

A former long-time member of the SEC Investor Advisory Committee, AFL-CIO Policy Counsel Damon Silvers said inflation in wealth and wages since the means tests were established 38 years ago has eroded the nation’s system of open and transparent markets by allowing more and more participants into opaque unregulated markets.

Consumer Federation of America Director of Investor Protection Barbara Roper, another former veteran member of the Investor Advisory Committee, claimed that the Commission’s refusal to raise the thresholds allows private issuers to remain free to peddle their securities to people who do not have access to essential information about the investments.

“It is further evidence that the SEC under Chairman Clayton has abandoned its central mission of protecting investors and promoting fair and transparent markets,” the Consumer Federation investor advocated said.

She noted the IAC has supported allowing knowledgeable employees of private funds to qualify as accredited investors for the purpose of investing in the fund at which they are employed.

“Those individuals arguably have access to information and financial sophistication, precisely what the accredited investor definition should reflect,” she said.

Source: Wall Street Journal

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