The US Securities and Exchange Commission recently made headlines when the agency adopted amendments to the “accredited investor” definition. Prior to the announcement, investors were deemed to be “accredited” based solely on income or net worth tests as defined by the Commission – a net worth of at least $1 million, excluding the value of primary residence, or maintain an income of at least $200,000 each year for the last two years (or $300,000 combined income, if married). While these wealth and income tests remain unchanged, the SEC’s expansion of the definition to include several additional qualifications beyond just financial metrics shows a marked shift in the Commission’s thinking toward more nuanced ways of showing financial sophistication.
These amendments have been a long time coming as the SEC, over the years, undertook a disciplined process through requests for comment and public convenings, among other engagements towards the development of this final rule. Perhaps most telling of all from this announcement is the Commission’s willingness to reassess longstanding precedent in view of changes in the marketplace and the continued growth and maturation of the private marketplace. This announcement is yet another indication that the SEC is willing to make adjustments to its oversight of investors, entities, and markets in a way that not only protects the SEC’s three-part mission – protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation – but actually enhances it.
While this refinement of the accredited investor guidelines is not necessarily a direct response to developments in the digital assets space, one suspects that, given the close look the SEC is taking at these new technologies and capabilities, one of their underlying motives is to unlock more of the power of these technologies to expand access to capital and capital formation. The messaging from the Commission’s recent announcement is reflective of what Chairman Jay Clayton has said and continues to echo regarding developments in the digital securities market, namely, that the SEC is open to evolving its regulatory structures and frameworks as markets evolve, but that it will not jeopardize its three-part mission in doing so. Certainly, there are arguments for and against the time it takes the Commission to evolve its frameworks, but simply because a new innovation is introduced does not mean the Commission must jettison wholesale current frameworks in response. Chairman Clayton has been consistent in this messaging:
“We have a regulatory agenda that we’re to get rid of the things that we require companies to do that don’t go to investor protection and that don’t go to material information. Look, our securities laws have been so successful – I mean there’s problems – but they’ve been so successful at contributing to this economy and they’re so effective…. People have used that to add things to our securities laws over time without in any way taking something away. So, I’m trying to look at it and say ‘are there things we can do to streamline this? Making sure we’re not doing anything to take away and hopefully enhance what we give to investors, but reduce the burden.”
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But there’s more to this announcement than simply the message of expanded market access. Indeed, one can perceive a subtext that regulation and technology can be mutually-reinforcing.
The digitization of financial instruments has opened up new opportunities to market and distribute assets in a highly efficient and compliant manner. Tokenized securities allow issuers and broker-dealers to attach specific transactional and regulatory policies to a particular asset that govern the token and ensure compliance in primary- and secondary-market transactions. The key here is that any changes to these rulesets, required by commercial or regulatory change, can be automatically updated for tokens in circulation in real-time and in a seamless way that ensures the continued automated compliance of these digital assets.
The additional qualifications approved by the SEC in determining whether an investor is accredited are simply additional attributes that can be added to the regulatory wrapper that governs a particular digital asset. The ease with which these assets can be created, embedded with appropriate policies and digitally marketed, provides yet another opportunity for broker-dealers and issuers to expand their offerings to a larger pool of investors and further democratizes the securities markets in allowing for newly-qualified investors to take part in private securities offerings.
This action by the SEC demonstrates its willingness, once again, to adapt current regulatory frameworks to innovations within the marketplace that not only respect its three-part mission but enhance it. The continued evolution of our securities markets and the technological advancements that support digital assets and automated compliance are complemented by the efforts undertaken by the SEC to enable broader distribution that further expands opportunities for newly accredited investors.
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