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SEC proposes allowing more investors access to private companies

[December 19, 2019] By Katanga Johnson

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission on Wednesday proposed changes to its decades-old definition of a professional investor in order to allow more Americans to buy shares in private companies.

The agency hopes the changes will boost retail investors' access to the swelling pool of companies that are staying private for longer and longer, but it has sparked worries among some investor advocates who say even seasoned investors struggle to spot problems with private companies.

Under current SEC rules, individuals who wish to put their money into the high-risk, high-yield private markets must earn an individual annual income over $200,000, or a combined $300,000 in shared annual income between spouses, as well as hold at least $1 million in assets, excluding one's home.

These standards constitute the "accredited investor" designation.

Wednesday's proposed changes, which are subject to public consultation, would broaden the definition to include a test of an investor's sophistication level "based on professional knowledge, experience, or certifications," the agency said.

The SEC said it was not clear yet how many people would meet the expanded definition, but it is seeking to capture eligible investors, like employees of hedge funds and holders of Series 7 and other licenses, who may not qualify based solely on income and wealth, but are "knowledgeable" of the risk in private offerings.

The SEC's proposal would not seek to raise the definition's current income or wealth requirements, but seeks comment on whether any thresholds should be lowered in parts of the United States where income levels may be lower.

The changes would also afford access to more institutional investors, including a so-called catch-all category for entities owning in excess of $5 million in investments.

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Chairman Jay Clayton participates in a U.S Securities and Exchange Commission open meeting to propose changing its decades-old definition of an "accredited investor" in order to allow more Americans to buy shares in private companies, in Washington, U.S., December 18, 2019. REUTERS/Erin Scott

The SEC under its Republican-appointed chairman Jay Clayton has steadily cut red tape to make the public capital markets more attractive for companies since 2017.

Simultaneously, the agency has sought to expand choices in private offerings, a sector that has raised $191 billion in the first nine months of 2019, which nearly matches the amount of capital raised in all of 2018.

"I believe it is important to focus on solutions that provide access to investment opportunities on substantially the same terms as those that would be available to institutional investors with protections ... that are akin to the protections in our public market," Clayton said on Wednesday.

Wall Street would likely praise the move as fund executives have long advocated for looser rules.

"The SEC is trying to increase investor participation in private offerings in a way that allows various types of registered and private funds to serve as gatekeepers for sophistication and access, rather than arbitrary income and wealth metrics," said Lawrence Stadulis, a partner at Washington-based Stradley Ronon.

The recent IPO fiasco of office leasing company WeWork is cited by investor advocates as an example of how even seasoned investors are sometimes unable to spot private-company pitfalls. WeWork's IPO had to be pulled in September after a lackluster response from investors due to concerns about its corporate governance standards.

(Reporting by Katanga Johnson in Washington; Editing by Michelle Price and Matthew Lewis)

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