The SEC is Letting You Invest Alongside the Wealthiest: What Does it Mean for You?
By Milind Mehere, CEO & Co-Founder of Yieldstreet
Over the last decade, a lot of regulatory changes have led to major innovation in financial services including digital payments, blockchain, challenger banks and investment platforms.
Today, a new opportunity to make investments is going live that could open asset classes that were walled off unless you were an institutional or a very high net worth investor.
There are many advantages in life that many of us will never know regardless of whether we achieve professional success: private clubs or access to private equity market deals. Above average returns on investments, however, should not be a benefit that only the wealthiest people enjoy.
The Securities and Exchange Commission agrees. The ultra-wealthy will no longer corner the market on private investments. The SEC’s new accreditation rule first announced in August this year, which expands the “accredited investor” definition, goes into effect today. Accredited investors are no longer only defined by net worth or income. Now individual investors, spouses, or investment companies can participate in private offerings if you hold certain financial professional accreditations or certifications (e.g. Series 7, Series 65, Series 82 licenses) or are a “knowledgeable” employee at a private investment fund. (Details on qualifications here.)
The rule couldn’t come at a better time. We are living through a yield crisis where treasuries are under 1% and historical volatility in the stock market amidst a pandemic. Company pensions are going extinct and the number of people that have to rely on employment in the gig economy has swelled 15% in the past decade according to the ADP Research Institute. That’s a third of the workforce that must account for future retirement, living and healthcare costs, making it more important than ever that their money can work for them.
Ultra wealthy investors have long known the power of access to the private markets, directing more than 50% of their portfolios to alternative assets according to Tiger 21, a peer membership network for high-net-worth individuals. Such investing has helped them actually profit amid the damaging impact of the pandemic to many people’s finances. Comparatively the average individual investor allocates only 5% of their portfolios to investments outside the traditional 60/40 stocks/bonds mix according to the CAIA Association. They are recognizing that allocation is no longer working to provide consistent and long term returns, and are increasingly seeking to shift a greater percentage of their portfolio to other options.
Access to the private markets is a prerequisite for building meaningful wealth. The new accreditation rule allows a larger set of investors to diversify with investment opportunities outside of the stock market - opportunities that generate ongoing cash flows while offering attractive risk adjusted yields.
This expanded definition to include more investors is happening as technology is also making access to above average returns more attainable for a broader population. The combination of technology, access to data and proliferation of mobile phone usage over the last decade has made the move to digitalization faster. This enables you to connect with consumers, educate them and provide transparency that wasn’t possible even 10 years ago. Combining that with changes to regulatory frameworks is enabling the next generation of financial services across the board, from how you bank, move money or invest. Fintechs, like my company Yieldstreet, are pulling back the curtain on the investing process offering alternative investment opportunities and modern investor education at your fingertips.
The new accreditation rule is the latest move by regulators that is a step in the right direction of striking a balance between protecting investors and still allowing private markets to perform. Just take a look at the Jumpstart Our Business Startups Act or (JOBS Act) that allows new forms of fundraising for companies and lets individuals to invest in them before they become publicly traded. As an example, the new rules increase RegA+, allowing start-ups to raise $5 million, from $1.07 million, and Reg A+ Tier II offerings to $75 million, from $50 million. There’s also Dodd-Frank, which has benefited both fund managers and investors with transparency and accurate disclosures.
Ultimately the ability to generate above average passive income should be an opportunity that all investors are able to consider. This new accreditation rule adds non-wealth eligibility criteria: financial sophistication of individual investors. Though I believe there is yet more room to extend this once clubby, inside-baseball world of investment in the private markets to an even broader population. Any expanded access needs to incorporate strong investor protections and education, which as noted, regulators are striving to achieve. My company, which serves accredited and non-accredited investors, works hard to arm current and prospective investors with education and transparency on all investment opportunities so they can make informed decisions.
Until the next wave of expanded access comes, to those who are now accredited investors, it would be prudent to put yourself on a path to financial independence by diversifying your portfolio with the wealth generating investment opportunities the private markets have to offer. This coming decade will be the golden age of fin-tech where by partnering with regulators, we can enhance consumer experience and access to various financial products across banking, lending and investing functions.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.