If in the past you were unable to invest in private equity due to a lack of wealth, in the future, you might only need to pass an exam to invest your money in the private equity market.
The U.S. Securities and Exchange Commission (SEC) announced a package of proposed rules and regulatory actions on Wednesday, aimed at making it easier for people to invest in private equity, private credit, and other private market funds.
At present, most of these funds are only available to "qualified investors." Historically, this has typically referred to individuals with net assets of over $1 million (excluding their primary residence); those with an annual personal income of over $200,000 or a combined annual income of over $300,000 with their spouse; or certain licensed financial investment professionals.
One of the proposed regulatory changes would include more professional qualification certificates within the scope of qualified investors—such as accountants, financial planners, investment bankers, and research analysts—while also introducing a new potential way to become a qualified investor: by passing an exam.
This exam has not yet been fully developed and will be designed by the regulatory body for the brokerage industry, the Financial Industry Regulatory Authority of the United States (FINRA). Paul Atkins, the chairman of SEC, stated that the idea is to allow investors to invest in the private market without having to prove that they have “a large wallet”, although he also pointed out that there are still “risks” involved.
Atkins stated in his comments at the SEC public meeting: "I agree with a fundamental concept reflected in today's announcements, that is, the access for qualified investors in private placements should not be limited to individuals who merely meet financial thresholds, and these thresholds are not the only indicators for assessing a person's ability to evaluate investment returns and risks."
What might an exam look like?
Although the exam is still in the process of being developed, its design will primarily be based on the existing securities industry foundation exam FINRA (also known as Securities Industry Essentials Exam, abbreviated as SIE), which tests basic knowledge of the securities industry. However, unlike the exams taken by those aspiring to enter the financial sector, passing this new exam does not grant one the qualification to work in the securities industry.
This exam will be open to all individuals aged 18 and above, and the fee will be similar to that of the SIE exam, which is $100.50. Those who wish to obtain access to the private market through this exam must take it in-person. The exam duration is approximately 2 hours and includes around 75 written multiple-choice questions. Below is a list of the topics that may be covered in the exam, as well as the possible percentage distribution of each section:
- Definition and structure of securities: 13%—20%
- Investment Risk: 20%—28%
- Information disclosure and regulatory requirements: 13%—20%
- Financial statements: 11%—19%
- Conflict of interest: 10%–18%
- Corporate Governance: 10%–18%
Promote the flow of funds into the private equity market
Before these changes were implemented, U.S. President Donald Trump signed an executive order requiring various agencies to expand access to the private equity market. Subsequently, the Department of Labor under the Trump administration also took action to make it easier for 401(k) retirement plans to invest in private equity assets. SEC The other potential rules announced this time also have similar objectives.
One of the proposals will allow all business development companies ( BDC ) to offer a variety of share classes. BDC is the structure behind many private credit funds targeting retail investors, and this change will help advisors generate more revenue when selling these funds. Another rule will adjust the redemption rules for the controversial interval funds ( interval funds ); during this year's spring private credit redemption rush, such funds became one of the focal points of attention.
Finally, SEC also proposed to make it easier for financial advisors to collect performance fees from client accounts. Previously, they could only charge such fees from "qualified clients," which were those whose assets under the advisor's management exceeded $1.4 million or whose net assets exceeded $2.7 million.
According to data from the research institution Cerulli Associates, financial advisors in the United States have currently allocated $1.9 trillion in assets to strategies in the fully liquid private market. The institution expects this figure to increase to $3.7 trillion by 2029.
There is still a long way to go before this exam is actually implemented. However, according to this proposal, with thorough preparation and passing the exam, in the future it might be sufficient for investors with net assets of less than seven digits to enter the private equity market. Nevertheless, the minimum investment threshold for funds means that when it comes to actual investment, you may still need more than just small amounts of money.
