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The Securities and Exchange Commission (SEC) is trying to broaden the definition of who is qualified to be considered as an accredited investor. At the moment, the regulatory body defines accredited investors as individuals who have $1 million in liquid assets or those who have a yearly salary.
These individuals are able to invest in private capital markets such as startups, hedge funds, venture funds, and private equity funds. SEC Chairman Jay Clayton said that it’s high time that the definition is updated, according to a press release on Dec. 18.
“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth ... 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. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets,” Clayton said.
The proposed additions
Under the proposed definition, individuals who are knowledgeable about certain private funds and possess credentials issued by an accredited educational institution will be considered as accredited investors. It will also include “knowledgeable employees” about a particular private fund, family offices with at least $5 million in assets under management, and spousal equivalents who could combine their assets for the purposes of qualifying for the new definition.
This announcement comes just a week after Clayton said that digital ledger technology (DLT) is a promising factor that could foster the growth of capital formation. The SEC has been slowly changing its stance on the crypto industry and transforming the definition of accredited investors could open up people in exploring the space.
Amendment open for public comments
However, it should be noted that the crypto market is still in its nascent stages and anyone investing in it should be deeply knowledgeable about how it works. The SEC has been trying to curb the crimes in this sector and has recently charged a startup founder of defrauding investors through an initial coin offering.
The agency has opened up the amendment for public comments in the next 60 days. It remains to be seen how well the public will respond to these changes. It’s expected that protection and capital growth will be the main theme of the argument from those who are opposing and supporting the amendment.
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