The Securities and Exchange Commission (SEC) has voted to amend the definition of accredited investor with a 60 day commenting period opened for the public.
“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only on a person’s income or net worth,” SEC Chairman Jay Clayton said before adding:
“Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.
I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
The definition of an accredited investor is currently based only on whether a person earns more than $100,000 a year or whether they have a net worth of $1 million excluding their residential property.
The proposal is to extend it to include individuals who pass a test, so showing they are knowledgable of the risks they are taking or are knowledgable of what it means to invest, with this test to be provided by an accredited educational institution.
They will also extend it to Indian tribes that want to own investments and family offices with $5 million in investments.
That means most people can easily qualify if they wish, but this test requirement means investment offerings can only be made legally through a third-party intermediary who can provide the “certification” as an accredited investor.
During the Initial Coin Offering (ICO) 2017 boom, startups used to just put up their own site and came up with their own token distribution method in a window of considerable innovation on how fair public offerings can be made.
SEC came down on that distributed approach, closing out ICO investment avenues, with the US regulator now relaxing them a bit to assist in capital formation while protecting individuals who might not quite have a clue of what they’re investing into.
Yet for these tokens to be easily exchangeable you need a public offering which costs some $10 million, with accredited investors restricted from selling their investment.
How this public offering aspect will be reformed in light of the digital revolution is not clear. SEC for example considers only the old exchanges, like CME, to be exchanges. They don’t think Coinbase is an “exchange,” even though Coinbase is fully regulated and fully compliant.
As raising capital through a tokenized share/equity model can be very convenient and efficient, you’d think an overall study of what needs to be changed to take into account the difference between paper and digital is now very necessary.
For now however SEC is seemingly limiting itself to just slightly extending the exemption, instead of holistically looking at the whole regime to see how it can be made fit for the digital age and how it can take advantage of the new capabilities brought by the tech revolution.