The SEC is planning to broaden the definition of accredited investors with a series of wide-ranging changes, such as including “knowledgeable employees” and persons with specific qualifications to its pool of investors. 

The federal agency outlined its proposed changes in a release today and has requested comments in the next 60 days. If approved, the move could bring more investors into the fold for cryptocurrency products and services.

“Modernization of this approach is long overdue,” stated SEC Chairman Jay Clayton in the release. “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.” 

New investor categories

As defined in Rule 501 for Regulation D, accredited investors are individuals with a net worth greater than $1 million or an annual income of $200,000, and organizations who have more than $5 million in assets. Couples who have income of $300,000 or more also qualify. Financial institutions with assets greater than $5 million and fund employees who satisfy income requirements are also included.

In the main, the SEC amendments add new categories of investors. In addition to the established categories based on income requirements, the Commission has proposed the introduction of a “catch-all” category of investors consisting of entities that own investments in excess of $5 million. Persons who have professional designations and certifications, such as a Series 7, 65 or 82 licenses, would also qualify as accredited investors. 

So can a “knowledgeable employee,” or employees with knowledge specific industry or issuer knowledge or expertise who would not otherwise be considered accredited investors. In a nod to civil partnerships that have become common in recent years, the SEC is considering adding the term “spousal equivalent” to the definition to enable such partnerships to pool their finances together to qualify as accredited investors.

Why is the SEC changing its definition of accredited investors?

Fueled by near-zero interest rates and dwindling growth prospects for companies across much of the developed world, private markets have become an attractive avenue for high returns for investors.

According to a recent McKinsey report, the number of private equity-backed companies had skyrocketed to 8,000 by 2017, an increase of 106 percent from a decade earlier. During the same time period, the numbers for US publicly-traded firms fell by 16 percent from 5,100 to 4,300. A significant reason for the increase in fund offerings for this market are unicorn technology companies, or companies with private market valuations greater than $1 billion. Their valuations have skyrocketed within a short period of time as investors, hungry for returns, pour cash into them and drive up their share prices. Such companies prioritize scale and growth over revenue. In public markets, the latter metric determines a company’s valuation.

The move may benefit private cryptocurrency offerings as well because it potentially broadens the numbers of investors for such offerings. Currently, income restrictions for Reg. A+ and Reg. D offerings, the most popular formats of such offerings, work as limits for the pool of investors for blockchain-based token sales. 

Based on the proposed changes, a “knowledgeable employee” or a person with professional certifications, such as the ones specified by the SEC, could also become an investor. Cryptocurrency products, such as investment funds, could also benefit from the changes by having greater access to investors.