Wealth management clients are increasingly expecting their investment adviser to provide access to private market investments. As we see this increasing demand for the “democratization” of private markets, Congress and the Securities and Exchange Commission (SEC) are considering potential legislative and regulatory ways to open up the private markets to retail investors.
Much of this attention has focused on the “accredited investor” standard, which the Wall Street Journal’s editorial staff has called “paternalistic.” They are not necessarily wrong; the regulatory history of this and other investor standards reveals that, historically, the SEC and Congress have used wealth and income as a proxy for sophistication. However, as many investment advisers know, the “accredited investor” standard is not the only regulatory barrier to these efforts.
Meeting the definition of “accredited investor” opens the door to investors participating in private placements of securities under the Securities Act of 1933 (as amended, the Securities Act). However, wealth management clients must often also meet the definitions of “qualified client” under the Investment Advisers Act of 1940 (as amended, the Advisers Act) and “qualified purchaser” under the Investment Company Act of 1940 (as amended, the Company Act), in order to participate in private funds that their advisers, or other investment advisers, manage.
In particular, the definition of “qualified purchaser” excludes many wealth management clients, as many hedge funds, private equity funds, and other private investment vehicles require investors to be qualified purchasers in order for the fund to comply with an exemption from registration under the Company Act found in Section 3(c)(7) of the Company Act. The definition of “qualified purchaser” generally requires, for an individual, that the individual has at least $5 million of investment assets or, for investors other than an individual, that the investor has at least $25 million of investment assets. The definition of “investment assets” excludes the investor’s primary residence and assets that the investor owns as part of a small to mid-sized business. Additionally, an entity cannot be a “qualified purchaser,” regardless of the amount of investment assets, if the entity was formed for the purpose of making the investment. For these regulatory considerations, sponsors that rely upon the exemption from registration under Section 3(c)(7) of the Company Act are particularly sensitive to ensure that they do not admit any investor that does not meet the definition of “qualified purchaser,” which makes offering these investment opportunities to appropriate investors (but who do not meet the definition of “qualified purchaser”) more difficult.
Recent events by Congress and the SEC commissioners indicate that change may be coming; however, the current actions suggest that these changes appear to be more muted than some would like and may not fully remove the criticism of “paternalism.” These actions also appear not to address the roadblock that many wealth management professionals have regarding the “qualified purchaser” limitation.
The proposals for reforms in private funds generally do not expand the definition of “qualified purchaser,” which the SEC cannot accomplish by regulation alone because the operative definitions are in the statutory text of the Company Act. Rather, the reform proposal seems to center around allowing registered investment companies under the Company Act to increase their investments into private funds.
In a speech given on May 19, 2025, SEC Chair Paul Atkins suggested that the SEC staff would change their position regarding when registered investment companies can invest in private funds, which could expand the opportunities for all investors (regardless of whether the investor even meets the “accredited investor” definition) to gain exposure to private funds.
Additionally, on May 20, 2025, the U.S. House of Representatives Committee on Financial Services considered a bill that would permit registered investment companies and business development companies regulated under the Company Act to invest in private funds. However, the Financial Services Committee did not take up a bill that was previously considered at a February 26, 2025, hearing that would have expanded the “private investment company” exemption under Section 3(c)(1) of the Company Act to permit greater participation by retail investors in venture capital-style private funds. A witness at that February 26, 2025, hearing testified to the Financial Services Committee about the limitations of fundraising to retail investors because of how the Securities Act and the Company Act interplay with each other in the private funds industry.
We continue to monitor these developments to best support our clients as they respond to this demand for private market investment opportunities. While these actions point to a potential solution of establishing registered investment companies as a means to aggregate client’s capital to invest in private markets, it may not be a solution for all wealth management professionals and other investment advisers. Registered investment companies have significant reporting and regulatory costs; fee structures are limited by the Company Act; capital and liquidity requirements imposed by the Company Act may limit the investments that the adviser desires to make. Additionally, the ways in which the Securities Act, the Advisers Act, and the Company Act interplay with each other are complex, and errors in legislation drafting may have unintended consequences.
