Two SEC commissioners criticized the agency publicly today for failing to update four-decade-old wealth thresholds used to qualify individual investors for the purchase of private equity—a policy they say will pose a risk to many investors, including senior citizens, who should not be putting money into the risky investments.
Commissioners Allison Herren Lee and Caroline Crenshaw lambasted the SEC in a joint statement for leaving in place 38-year-old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors. They noted private equity lacks the traditional transparency, liquidity and regulations required of other investments.
The commissioners were reacting to a set of amendments adopted by the SEC today that also qualified family offices with at least $5 million in assets under management and their “family clients” to invest in private equity.
For investors overall, the SEC’s failure to update the accredited investor thresholds has resulted in an increase of 550% in qualifying households since 1983, as private equity continues to grow at unprecedented rates, surpassing the public markets and accounting for nearly 70% of new capital raised in 2019, according to the commissioners’ calculations.
“With its actions today, the commission continues a steady expansion of the private market, affording issuers of unregistered securities access to more and more investors without due regard for the risks they face, and without sufficient data or analysis to ensure that our policy choices are grounded in fact rather than supposition,” the two commissioners said.
The number of investors, many of them seniors, “will only continue to rise. How much can we expect it to rise? We will not find the answer, or even the roughest of estimates, anywhere in the release. Thus we not only reject a recommendation with remarkably broad support, but we fail to undertake basic economic analysis in support of that choice,” they said.
While the SEC cited increased investor access to information, including via internet, social media and “powerful home computers and mobile computing devices,” Herren Lee and Crenshaw said the agency’s logic “ignores the naturally opaque nature of the private market where issuers are not required to provide the robust disclosures that are features of public offerings. No matter how powerful your computer is, you cannot access information that is not there."
The risks to seniors are particularly profound since they have the most assets, the commissioners argued. “We know that an increasing amount of wealth is concentrated in older households. We know that older investors are more likely to have accumulated wealth gradually over time, rather than necessarily as a result of financial sophistication. We know also that unregistered offerings are consistently used in fraudulent schemes to target seniors,” the commissioners said.
According to an SEC statement, however, the amendments update and improve the accredited investor definition “to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets.”
“Today’s amendments are the product of years of effort by the commission and its staff to consider and analyze approaches to revising the accredited investor definition,” said SEC Chairman Jay Clayton. “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”
Specifically, the amendments adopted by the SEC did the following:
• Categorize those who hold a Series 7, Series 65 or Series 82 license in good standing as accredited investors.
• Add a new category to accredited investors based on professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the commission may designate. Investors holding CPAs, CFP and CFA certifications may be deemed accredited investors, the SEC release said.
• Add a new category including Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries that own “investments” in excess of $5 million.
• Add “family offices” with at least $5 million in assets under management and their “family clients."
• Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.