Barely a week ago, in my most recent post, I flagged impending SEC proposals to expand the people eligible to purchase private placement equities (not registered with the SEC). To protect inexperienced or less solvent investors from the risks inherent in purchasing unregistered stock, which is of course both speculative and as a practical matter illiquid, the SEC today permits purchases only by people who are in effect market experts or, alternately, those whose personal annual income exceeds $200K ($300K for a household) or whose adjusted net worth is over $1M.
The SEC has proposed action in this area per press release of two days ago (see prior post). While frankly I expected they would trim back the financial threshold to open up such investments to less solvent investors, instead (at least so far) the Commission has not. Rather, the Commission has proposed to expand the cadre of people deemed market experts (and hence able to protect themselves in such purchases) in two areas.
First, the Commission proposes to include, in the definition of accredited investors, certified financial planners and persons who are licensed in certain areas by FINRA (Financial Industry Regulatory Authority). This expansion is logical; these are folks who advise as to investments and should be trusted to properly invest their own money.
Second, in another interesting proposal, the SEC proposes to permit fund managers to earn bonuses if their mutual funds or ETFs (exchange traded funds) perform very well. The idea is that providing a bonus may well motivate money managers to direct their funds into more speculative markets, including private share investments that have the potential for explosive growth. Today, bonuses are permitted to advisers only in certain funds where investment in such funds is restricted to a more senior class of investors. There is some logic also to this suggestion although one might see a diversification of funds, with bonus option to managers, so that some funds will and some will not undertake private share strategies.
And, in a fascinating twist, the SEC is considering asking FINRA to give an examination to persons over the age of 18 to determine, I presume, whether they are of sufficient knowledge to make private placement investments. In theory, I suppose it makes no sense to say that such an enterprise is illogical, although one might argue that if someone is that smart then they are making enough money to fulfill the current statistical criteria. I am particularly disturbed with the suggestion that someone who turned 18 might be eligible, however; I have experience in real life with people who are 18 and, however smart or learned they may be, I do suggest that some life experience and personal planning perspective ought to be required; perhaps my four progeny are below par, but based on personal experience I think age 18 is at least 7 years too soon. The age-18 to -25 cadre may well be doing well in the prediction markets or on sports betting sites, and younger folks surely have a longer time line to sit with speculative stock in now-private companies, and any single given younger person may be fully adept and informed, but establishing the “examination” criterion at 18 still strikes me as overly aggressive.
As with all SEC proposals, there will be publication and a comment period. But I must say I am surprised that the Commission, at least so far, did not drop the financial solvency measures directly. The cynic in me suggests that, given the pace of past and future inflation, there is no need to adjust the financial thresholds as they are become less restrictive day by day….