Accredited investors: testing, testing
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In America, one needs a licence to sell securities. Possession of such a licence will now enable purchase of once verboten securities. On Wednesday, the US Securities & Exchange Commission announced that it was “modernising” the requirements for accredited investors. Accredited investors are allowed to purchase securities that are “unregistered” and lack the disclosures of publicly traded stocks and bonds.
Among the qualifications that will satisfy the new requirements are Series 7, Series 65 or Series 82 licenses that come from passing largely elementary exams put forth by Finra, the self-regulatory agency of Wall Street. The previous accredited investor criteria was centred on income and wealth. The SEC now asserts that financial sophistication can be demonstrated in non-monetary ways. It hopes the burgeoning private capital markets will become accessible to a broader slice of Americans. Yet public markets are reaching new highs and trillions of dollars already lie in private equity and the like. It is not obvious that the risks newbie accredited investment firms will assume are worthwhile or are necessary for business formation.
The criteria’s existing construction means that knowledgeable but less well-off Americans are excluded while those with money in the bank but little experience in markets are considered sophisticated. Accredited individual investors currently are those whose annual income exceeds $200,000 (or $300,000 as a couple), or who otherwise have a net worth exceeding $1m excluding the value of a primary residence. But those figures, established in the 1980s, represent increasingly small figures in real economic terms.
The SEC cites data showing that there was $1.5tn of funds raised in unregistered offerings last year — slightly more than in registered ones. With companies staying private longer, unaccredited investors are missing the chance for wealth creation. Yet the S&P 500 is at a record high in the midst of a deep recession; abundant capital is clearly available. Companies face little shortage of financing if asset prices keep rising. The SEC is addressing a problem that barely exists.
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