The US Securities and Exchange Commission today announced that it is relaxing restrictions around who is allowed to invest in securities. That means that a whole new class of investors might finally be able to invest in private securities offerings. Lawyers told Decrypt that the impact is likely small for crypto investors, at least until Congress works things out.
Under the old definition, the SEC only let those with a net worth north of $1 million or an income of over $200,000 invest in US private capital markets—bankers, high-rollers, Silicon Valley’s finest, and so on. The premise was that these people, so-called accredited investors, were knowledgeable enough to invest their money in high-risk projects and rich enough to withstand heavy losses.
The SEC today announced that qualifying as an accredited investor is no longer reserved for the wealthy. Under a new, amended definition, those with “certain professional certifications, designations or credentials” can apply. The SEC is requesting advice on acceptable criteria for qualification.
Drew Hinkes, an attorney at US law firm Carlton Fields, tweeted today that the amendment is “not meaningful at least not yet,” as it simply adds “flexibility” for Congress to decide who qualifies.
the flexibility to add certifications, designations, or credentials in the future opens the doors to new, more meaningful additions. If you want more people to have access to private placements, VOTE for members of Congress who support that policy.
— Drew Hinkes (@propelforward) August 26, 2020
But the result, as put succinctly by SEC Commissioner Hester Peirce in a statement today, could be that “mom and pop retail investors [can] invest in private offerings.” She said, “Today’s changes are rooted in a recognition that wealth and income are not always great proxies for an investor’s sophistication.”
After all, as Luciano Nonnis, CEO and Founder at crypto trading platform DXone, told Decrypt: “When people enter a casino, they don’t have to sign a document that you can’t get your money back if you lose. They walk in and start gambling.”
What does this mean for crypto investors?
Marc Boiron, a partner at US law firm Manatt, Phelps & Phillips, LLP, said for most crypto investors, the new accredited investor definition “does not change anything,” since “most investors are transacting in crypto that either is not a security or is not being treated as a security.” Anyone can buy Bitcoin, after all—that’s the point.
However, the new definition will increase the number of people who can invest in early-stage companies working on crypto projects, he said. That includes private token sales.
For the past decade, some American investors have run gaily into the welcome arms of cryptocurrency projects, which have generally not registered their token sales with the SEC because they believe they are not selling securities.
The SEC has rarely been convinced, and in recent years has chased after several ICOs for running illegal securities offerings. The SEC has previously also found that decentralized autonomous organizations (DAOs) running token offerings may be subject to securities laws.
The new definition, however, will theoretically let more people qualify as investors for on-the-books investments in crypto companies. One legitimate way to raise money is to receive an exemption from the SEC and sell securities to a private audience of accredited investors.
Seamus Donoghue, VP Sales and Business Development at METACO, said that the new definition might encourage investors to get involved. Cryptocurrency businesses with limited reach now would have a whole new pool of investors to market their project to, he said.
“The SEC has potentially blown the doors off market access if qualified investors are no longer measured by a minimum of liquid financial assets but can be designated ‘qualified’ by market knowledge, education or professional designation,” he said.
Hinkes, however, told Decrypt that the expansion of the definition will probably have “little impact on most crypto investors.” The new definition will “likely only slightly enlarge the group of investors who can invest in private placements, including private placement offerings of digital assets,” he said.
Boiron added: “If the SEC were to add categories of licensed or certified people who will be deemed accredited investors, then the impact could be greater.”Dave Hodgson, chief investment officer of NEM Group, told Decrypt that until Congress decides on “which credentials are required to be considered intelligent enough to manage your own funds, it is hard to know how wide the change is.”