Friday Letter: SEC defining accredited investor means a lot to some

In widening the definition beyond the one's financial net worth, the SEC takes another step to permitting retail investors into the private funds market and increasing access to venture in particular. ICOs might also become more accessible to the general public.

This past week, the Securities and Exchange Commission adopted final rules to update the definition of “accredited investor.”

Previously, an accredited investor in the US meant the individual had to have a net worth of more than $1 million and annual income greater than $200,000.

The new definition allows individuals holding certain licenses (such as from Series 7, 65 and 82 exams) to be considered an accredited investor. It also defines family offices with at least $5 million AUM and “knowledgeable employees” of private funds as accredited investors. This expands the group of possible accredited investors. People who did not previously meet the wealth threshold, but are considered financially sophisticated enough to understand the risks and merits of investing in offerings, are now allowed the opportunity to invest in registered offerings.

In a prepared release, SEC chairman Jay Clayton said: “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth.”

I saw a lot of chatter on Twitter that essentially said the SEC’s ruling is nice, but not that impactful to early-stage investing.

However, many noted this moves the venture community one step closer to allowing retail investors to invest in VC deals and funds.

One VC who said it is a big deal is McKeever “Mac” Conwell II, who tweets via @MacConwell and runs a pre-seed fund at Maryland Technology Development Corporation.

He tweeted, in regards to the SEC ruling: “I don’t see downside. I see it as an incremental step in the right direction.”

I wonder, however, how many people will register to take one of the exams mentioned above. I can’t imagine a rush to accreditation, but it is certainly an alluring path to consider.

Really, though, I believe we’ll see the biggest effect in the crypto community. Currently, only wealthy investors have access to token sales and ICOs. And that runs counter to the crypto world, which likes to champion how democratic it is and that everyone, not just accredited investors, should have access to investing.

My colleague Bill Myers wrote more about the the SEC ruling at our affiliate publication Regulatory Compliance Watch.

The ruling passed 3-2, with the two Democratic commissioners casting the two no votes. Myers writes that the two commissioners, Allison Herren Lee and Caroline Crenshaw, rejected the argument that ordinary investors will be protected from private markets volatility.

Let me know what you think about the SEC’s ruling and its impact on VC and cryptocurrency. I would love to hear from you.

You can reach me at agoldfisher@buyoutsinsider.com and I’m open to voice and video calls.