3-minute read

The US Securities and Exchange Commission has proposed a series of regulatory changes that could make private-market investments more accessible to a broader group of individual investors.

The proposals cover private equity, private credit, venture capital and other alternative assets that have traditionally been available mainly to wealthy or professionally qualified investors. The changes would also modify how certain investment advisers are compensated and give some private-market funds greater flexibility over investor redemptions and share classes.

The proposals are not final rules. They will go through a public notice-and-comment process before the SEC decides whether to adopt them.

More investors could qualify for private-market access

One of the most significant parts of the package concerns the definition of an accredited investor.

Currently, access to many private offerings is generally restricted to investors who meet specified income or net-worth requirements, along with certain professionals who already qualify under existing rules.

The SEC is considering additional routes based on financial qualifications rather than personal wealth. The proposed pathways include a new examination that could be developed by FINRA, along with professional credentials such as a US Certified Public Accountant licence, Chartered Financial Analyst charter and Certified Financial Planner certification. Certain FINRA investment banking and research analyst licences are also being considered.

If adopted, the changes could allow a significantly larger pool of financially qualified individuals to participate in private-market offerings without having to meet the same wealth-based thresholds.

Performance fees could change

The SEC is also proposing changes to performance-based compensation for registered investment advisers.

Under the proposal, advisers to certain regulated funds could have greater scope to receive compensation linked to investment performance. One version of the proposal would allow performance fees of up to 20%, bringing the structure closer to arrangements commonly used in some alternative investment strategies.

The proposed framework would also require greater disclosure around performance-based compensation.

The SEC's rationale is that allowing more flexible compensation structures could encourage investment advisers to offer private-market strategies through regulated funds, potentially giving individual investors access to investments that have traditionally been difficult to reach through conventional fund structures.

However, performance-linked fees can also create different incentives for fund managers because their compensation rises when investment gains increase. That makes valuation practices, fee disclosures and the level of risk taken by fund managers important considerations.

Private funds could get more flexibility on redemptions

Another proposal focuses on interval funds and closed-end funds, which are increasingly used to provide investors with exposure to less-liquid assets.

The SEC is considering changes that would allow certain interval funds to offer monthly repurchase opportunities, compared with the more limited schedules currently permitted. The proposals would also give regulated closed-end funds a clearer framework for offering multiple classes of shares.

The objective is to make fund structures more compatible with private-market investments while providing investors with additional mechanisms for accessing their money.

However, greater redemption flexibility does not mean that private assets themselves become as liquid as publicly traded stocks. Private companies, private credit instruments and other unlisted investments can still be difficult to value and sell quickly.

Opportunity and risk move together

The proposed changes mark a significant shift in how individual investors could access private markets.

Private-market investments can provide exposure to companies and assets that are not available through public stock exchanges. At the same time, these investments can involve limited liquidity, complex valuations, higher fees and fewer investor protections than publicly traded securities.

The SEC has acknowledged that private offerings can carry greater risks and fewer protections than public investments. The debate around the proposals therefore centres on how to expand access while maintaining appropriate safeguards.

Supporters of wider access argue that financial sophistication should not be determined solely by income or wealth. Critics have raised concerns that broader access could expose less-experienced investors to complex products and fee structures that they may not fully understand.

What happens next?

The SEC's proposals will now move through the public comment process, meaning the rules could still be changed before any final decision.

For investors, the immediate significance is therefore not an immediate change in eligibility. Instead, the proposals indicate a potential expansion of the regulated channels through which individuals could gain exposure to private equity, private credit, venture capital and other private assets.

If eventually adopted, the changes could reshape the boundary between traditional retail investing and the private markets by making certain alternative investments accessible to a broader group of individual investors.