Regulators still grapple with the definition of a ‘sophisticated investor’ in private markets
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Just what, exactly, is a “sophisticated investor”?
It’s a question the US Securities & Exchange Commission (SEC) has been pondering for a number of years.
The SEC first commissioned a report into the definition of the term back in December 2015, where it considered a number of different approaches.
And it’s sought comment from industry participants every year since, with recent to various changes or expansions.
It’s important because someone who meets the criteria gets opportunities to participate in private funding rounds that aren’t available to everyday retail investors.
To be accredited as a sophisticated investor in the US, a person must own net assets of more than $US1m (not including their primary residence), or two years earnings of at least $US200,000.
In Australia, the rules are similar. Under Subsection 708(8) of the Corporations Act, a sophisticated investor is defined as someone with:
– Gross annual income of $250,000 or more for a period of at least two years;
– Net assets of at least $2.5m.
Both designations include net assets or income controlled by a company or trust of a given individual.
People who meet that income or asset criteria are deemed to have sufficient financial knowledge to evaluate private investments without getting burned.
But the definition has limits, starting with the fact it’s arbitrary (i.e. a person with income of $240,000 or assets of $2.4m wouldn’t meet the criteria, but wouldn’t necessarily be less qualified).
The SEC continues to deliberate, having just released another concept report seeking comment from industry players.
One idea considered by the SEC was whether to include people who have passed specific financial exams that imply a given level of knowledge.
And they even tabled a broader idea which would allow anyone to “opt in” to being an accredited investor, as long as they are provided with full disclosure about the inherent risks.
When contacted by Stockhead for comment, a spokesperson for Australia’s corporate regulator ASIC expressed surprise that such measures were under consideration.
To be sure, the SEC’s deliberations are preliminary in nature. The regulator continues to seek comment but doesn’t appear to be in a big hurry to implement the changes.
But it’s an interesting regulatory development nonetheless, from a country where private capital markets are much bigger and more liquid than any other jurisdiction.
Closer to home, ASIC still looks like it’s a long way off from relaxing the rules around sophisticated investor accreditation.
A report released in March called “Mind the Gap” showed the regulator is putting a high priority on boosting consumer awareness when it comes to financial advice.
The report raised concerns that there’s a lack of awareness in the broader community about the difference between general and personal advice in the process of making investment decisions.