In case you missed it, there was big news in the private capital markets last week. No, not just the new direct IPO filings from venture-backed “unicorns” like Palantir and Asana, nor the latest in a string of SPAC announcements – but something more fundamentally important.
Last Wednesday, the SEC (this one, not that one) announced that after years of study, the regulatory body is expanding access to the private capital markets by updating the “accredited investor” definition.
Under current rules, privately held companies seeking to raise capital must limit their fundraising to accredited investors. Since private companies are not subject to the registrations and disclosures required of public companies, the regulators want to restrict investments in those companies to accredited investors who likely have the ability to fend for themselves and to withstand potential losses from investing in riskier private offerings.
For individual investors (as opposed to institutional ones), the definition of “accredited” has primarily been based on specific financial metrics: at least $1 million in net worth (excluding equity in the primary residence) or $200K of income (or $300K for couples) for the last 2 years (and expected for the current year). However, these simple metrics are blunt and arbitrary measures of financial wherewithal, as there are many financially savvy individuals who could make disciplined investment decisions – but who do not yet meet the financial criteria for accreditation.
The SEC last week moved to address this limitation by expanding the accredited investor definition to include additional qualification measures based on “financial sophistication.” Under the new rules, investors may now qualify as accredited based on “certain professional certifications, designations or other credentials issued by an accredited educational institution.”
As a first step, the new amendment specifically designates that holders in good standing of the Series 7, Series 65, and Series 82 securities licenses are now considered accredited. While this new qualification would add no more than about 12,000 new accredited investors to an estimated pool of about 16 million (see footnote for sources), this move is an important conceptual step change in broadening access to the private capital markets.
The commission indicated it will further widen the accredited investor pool by considering other qualifying certifications and credentials in the future. We expect one of those certifications will come from the Angel Capital Association. VentureSouth has been a proud member of the ACA since our inception, and we appreciate the tremendous work that organization has done through its public policy initiatives to advance efforts like this one to support entrepreneurs and the accredited angel investors who provide them with much needed capital.
After all, we know that entrepreneurs and fast-growing young enterprises create all the net job growth in our economy, so we applaud the SEC for taking this important step to improve access to capital for entrepreneurs.
See page 36 here for the SEC’s most recent estimate of the number of accredited investor households
See page 10 here for current estimate of Registered Investment Advisors who must hold the Series 65 license. The estimate of 12,000 maximum new accredited investors is an upper bound as many of these individuals may already be accredited, or may not also also hold the Series 7 and Series 82 licenses.