The ICO phenomenon democratised the world of investing. For the first time in history, anyone regardless of financial status or class could get in on the ground of seed investments the likes of which were previously only reserved for the wealthy and powerful in their Silicon or Ivory towers.
However, alongside the chance to make massive gains came the exposure to equally massive risk. This is where the SEC steps in – to prevent everyday citizens from being conned out of their money and losing their life savings to the likes of a scam like OneCoin or BitConnect.
Let’s not forget that the securities exemption laws in the United States are more than 70 years old. They go way back to a world in which the majority of the population wasn’t exposed to higher education, didn’t have access to a tool to educate themselves, and certainly couldn’t afford a broker.
So, with the announcement by the SEC yesterday about updating its definition of “accredited investor” (those people allowed to participate in offerings), does that mean the Commission is finally conceding the need for change?
The SEC is looking to ‘increase access to investments’
The title of the announcement certainly looks encouraging. It says “SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments”.
Let’s not forget that it’s very hard to be classified as an “accredited investor” right now. At the moment, to meet the requirements, an individual investor must possess a net worth of more than $1m.
An entity can only invest if it controls over $5m in assets. This cuts out the average Joe from potentially getting in on the ground of prosperous projects.
The reasoning behind this is meant to protect retail investors from predatory offerings. However, the Commission has long come under fire for allowing the rich to get richer while prohibiting everyday people from accessing wealth.
The new amendments put forward by the SEC could serve to open up investment opportunities to a wider pool of people. They would include new categories such as allowing people with professional qualifications who can prove they are knowledgable enough to invest.
The US regulator is now looking for public commentary on how to amend its accredited investor classification.
Modernisation is long overdue
At first glance, this proposal by the SEC looks to be a positive sign of progress.
Thanks for this @SEC_Enforcement .
Looks like a step in the right direction!
— Leighton Webb (@HomeWebb) December 18, 2019
Chairman Jay Clayton stated: “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.”
“Modernisation of this approach is long overdue. 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.”
However, it’s not quite clear whether the $1m threshold still remains or, in fact, if it would effectively be raised to $5m, forcing individual investors to go through a fund.
I think it's a new definition for any entity with $5M, so the $1M definition for individuals would persist
— Avichal Garg (Electric Capital) ⚡ (@avichal) December 18, 2019
There will no doubt be much public commentary during the 60-day period in which all these issues will be discussed.
What does this mean for crypto?
When it comes to regulated offerings in the crypto space, the accredited investor category applies to exemptions 506(b) and 506(c). These both fall under Regulation D.
Depending on how the upgrade pans out, this could make regulated offerings available to people on a merit-based system rather than a wealth-based system.
This means that the SEC could continue to serve the people by protecting unprepared investors while levelling the playing field.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.