The Securities and Exchange Commission (SEC) voted unanimously today to approve new pathways for individuals to qualify as an Accredited Investor, expanding opportunities to access private securities offerings.
Broadly speaking, an Accredited Investor may participate in Reg D securities offerings. This exemption is used by nearly every promising early-stage firm today because of its simplicity. The market is measured in the trillions annually. An Accredited Investor is generally an individual who earns over $200,000 a year in salary or who has a net worth of over $1 million beyond a primary residence. If married, the income hurdle jumps to $300,000. The rule acts as an economic barrier to entry for those deemed unsuited to invest in these private offerings, yet it makes no accommodation for financial acumen or experience.
To make private securities more accessible to the public, the Commission has approved a new approach that allows five new paths to be deemed accredited. These are largely based on professional qualifications, including CPIs, CFAs, CFPs, the FINRA-issued Investment Banking Representative license (Series 79), and the FINRA-issued Research Analyst license (Series 86/87). The new rule also approved a FINRA-administered test available to anyone over 18.
The existing wealth hurdles will remain.
While the professional qualifications are relatively clear-cut, the FINRA exam is not yet wholly defined.
The exam is said to be modeled on the Securities Industry Essentials (SIE) exam. It will include 75 multiple-choice questions, and test takers will have 2 hours to complete it. Treated as an entry-level exam, the SIE has little math and is designed to help applicants better understand whether a career as a broker makes sense.
If a taker passes, the qualification remains in place for ten years.
The expectation is that most of the population will be within sixty miles of a test provider, and the test will cost $100, making it accessible nationwide.
Topics covered on the exam will include:
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Definitions and structures of securities (equity, debt, SAFEs, private funds, REITs, Reg D / A / CF vs. registered deals)
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Investment risks (liquidity, lockups, concentration, leverage, fees, dilution)
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Disclosures and regulatory requirements
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Financial statements and ratios (GAAP vs. non-GAAP, debt-to-equity, IRR, yield)
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Conflicts of interest
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Corporate governance (fiduciary duties, voting, tag-along / drag-along, ROFR)
Chairman Paul Atkins and the two current Commissioners welcomed the updated definition. Commissioner Mark Uyeda noted that public pensions had long had access to private securities investments as they generated outsized returns for beneficiaries. Commissioner Hester Peirce pushed her more libertarian views on the government having any say in individual investment decisions, while asking whether other entities will be allowed to provide Accredited Investor exams. Staff said that the door was open and interested parties should reach out. All three acknowledged that private markets have grown while public markets have declined, excluding a growing population from a viable diversification strategy and asset class.
Two other proposals were also approved that would provide greater access to private securities offerings for retail investors, including regulated funds that would allow performance-based compensation and other updates to encourage investment advisor support while allowing greater retail access alongside fiduciary requirements.
The Atkins Commission has, in short order, executed on its stated mission and agenda to enable innovation and improve the ecosystem for capital formation and retail access. While the prior Commission during the Biden administration was best known for a sclerotic approach to rulemaking, pursuing a political/social agenda and described by some as “anti-capital formation,” Atkins has shown what can be accomplished if the SEC stays on mission and message. This Commission will go down in securities history as a transformative period and one that improved capital markets for all.
The new rules are open for public comment for 60 days after publication in the Federal Register.
A Fact Sheet is available here.