The SEC has voted 3-to-2 in favor of proposing rule amendments to the definition of “accredited investor” to enable more qualified individuals and institutions to participate in private markets.

For brokers and advisors, having more flexible accredited investor rules would mean having a bigger pool of investment products and strategies to offer retail investors who could qualify as accredited investors if the rules change.

However, state regulators have warned that relaxing the definition of accredited investors could end up hurting retail investors. Consumer advocates say the SEC’s actions could even lead to conditions like those that caused the U.S. stock market crashes of 1929 and 2008.

The SEC lets accredited investors participate in investment opportunities that are generally not available to non-accredited investors. These include investments in many private issuers and offerings by hedge funds, private equity funds and venture capital funds.

Under SEC rules, individuals are classified as accredited investors if:

  • Their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year;
  • Their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.

The accredited investor definition also includes — among others — banks; registered broker-dealers; insurance companies; registered investment companies; employee benefit plans under Erisa (if a bank, insurance company, or registered investment advisor makes the investment decisions, or if the plan has total assets in excess of $5 million) and a tax-exempt charitable organizations, corporations, or partnerships with assets in excess of $5 million.

SEC chairman Jay Clayton noted at the regulator’s open meeting Wednesday that the current key tests to qualify as accredited investors are financial only and excludes many individuals who are clearly qualified to participate in private markets.

Clayton said he believes it’s “important” to provide opportunities to qualified retail investors to participate in private markets in “substantially the same terms as institutional investors.”

Among the proposed amendments under consideration are allowing individuals with certain professional designations and other accreditations to qualify as accredited investors, according to SEC staff that presented at the open meeting. This includes individuals who possess the Series 7 (General Securities Representative Qualification Examination), 65 (Uniform Investment Adviser Law Examination) and 82 (Private Securities Offerings Representative Examination) securities licenses administered by Finra.

They also include the proposal to consider in rule amendments knowledgeable employees of private funds; spousal equivalents; the calculation of aggregate net worth; and expanding of certain categories to include SEC-registered and state registered advisors, limited liability companies with more than $5 million in investments, family offices with at least $5 million in AUM, and a catch-all to add entities owning investments more than $5 million. That last item would include Indian tribes and certain government bodies.

The proposed amendments currently under consideration would not adjust the thresholds for inflation, according to SEC staff.