A new government proposal to loosen restrictions on who qualifies as high-net-worth individuals known as accredited investors could be a boon to asset managers seeking new sources of capital.
The U.S. Securities and Exchange Commission issued a concept release on June 18 requesting public comment on several exemptions from registration under the Securities Act of 1933. The release seeks to improve capital formation, efficiency and investor diversification. One particular exemption that asset managers are focused on is the commission’s effort to change the definition of an accredited investor.
Currently, an accredited investor is anyone who:
- earned income in excess of $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or
- has a net worth over $1 million, either along or together with a spouse (excluding the value the person’s primary residence)
If an investor meets the above standards, he or she may participate in investment opportunities that are generally not available to retail investors, such as alternative investments including private equity, venture capital and hedge funds. According to the SEC’s concept release, approximately 16 million U.S. households qualify as accredited investors. A majority of those are geographically skewed toward the northeast and west.
The concept release discusses some potential changes to the definition that include:
- allowing individuals who obtain a certification or degree such as a CFA, CPA, or MBA to become an accredited investor
- decreased dollar amount thresholds for investment
- permitting those who pass an accredited investor test to qualify
- letting securities professionals become accredited investors
Fundraising by asset managers
Any changes to the accredited investor definition will increase the pool of potential investors for asset managers looking to raise capital. This concept release comes at a time when the SEC estimates that $2.9 trillion in capital was raised in the United States last year from exempt offerings versus $1.4 trillion via registered offerings. Figure 1 below from the concept release breaks down the two offerings from 2009 through 2018.
Source: U.S. Securities and Exchange Commission
According to the concept release, retail investors looking for greater diversification and performance returns may find investments in exempt offerings to be uncorrelated to the public equity markets. In addition, asset managers aiming to increase assets under management will likely rely more on retail investors to achieve that goal.
Timing of potential changes
Although the SEC’s concept release is a good first step in the right direction, it is unlikely that the agency will take immediate steps to change the definition anytime soon. Based on the SEC’s history, a concept release is usually years away from a formal proposed rulemaking. The SEC is soliciting public comments before Sept. 24, 2019.