It is not just Apollo, State Street Global Advisors, BondBloxx or Virtus’s private credit ETF strategies that are opening the private markets to retail investors, others are using innovative new approaches to achieve the same end.
Firms like Robinhood, a trading and investment platform for individual investors, are working on tokenization technology to solve this problem, for example. The trading platform could provide retail investors with fractionalized ownership of U.S. private assets such as real estate, venture capital, and private credit. The Securities and Exchange Commission’s definition of an accredited investor prevents it from doing so in the U.S. The rule prevents individuals not deemed “sophisticated” enough from investing in products that are not registered with the SEC. (Robinhood, which has been criticized for ‘gamifying’ investing, was at the center of the trading frenzy over meme stocks such as GameStop and AMC.)
Steve Quirk, chief brokerage officer at Robinhood Markets, said the firm has a technology and regulatory approach for getting private investments to retail investors. “The second part is to talk to the regulators and elected officials and ask ‘do we really need accredited investor rules that exclude basically 95 percent of the country from investing in real estate... on a fractional basis?’”
Quirk said that the firm has gotten traction with the SEC, which recognizes that the current definition of an accredited investor needs to be amended while also maintaining suitability and safety standards.
In a speech shortly after the departure of former chair Gary Gensler, acting chair Mark Uyeda addressed the rules governing who can and can’t invest in private companies.
“Most commentators seem to agree that the current income and net worth thresholds for an individual to qualify as an accredited investor either need to be changed or are insufficient,” Uyeda said in the speech. “Another consideration is whether the ‘all or nothing’ approach of the accredited investor definition is appropriate. If an individual does not qualify as an accredited investor, even under an expanded definition, should he or she not be able to have any exposure to private offerings? Or should the commission’s exempt offering regime use a sliding scale approach and allow any individual to invest at least a small amount in private companies over the course of a year?”
The SEC made amendments to the definition in 2020 to include registered brokers and investment advisors, and in 2023, established an exam to gain accredited investor status.
Still the SEC only allows a limited number of individuals to invest in companies before they are public. Quirk wants the commission to open up private investments to younger investors, who make up the core of Robinhood’s users.
Quirk would also like to see regulators encourage cross border trading, so a European investor could buy tokenized shares of U.S. private market assets.
Robinhood’s chief legal officer, Dan Gallagher, was a commissioner at the SEC during the Obama administration so he likely has the ear of the regulator and its potential new chair, Paul Atkins. Even so Quirk does not expect the new administration to act quickly to change its rule.
“They’ll be very thoughtful about it. They won’t want to move that fast on anything like this, because it also changes the industry,” he conceded, referring to the impact on clearing and custody rules. “But the conversation around it has already started. It’s going to be really useful and helpful.”
Changing the definition was also debated by the House Financial Services Subcommittee on February 26, following the sponsorship of the Accredited Investor Definition Review Act by republican congressman Bill Huizenga of Michigan.
Tokenization would allow retail investors to buy into a fund-like structure that has been broken up into ‘tokens’ that can trade with daily liquidity even as the actual underlying assets in the fund are valued quarterly. The token would sit on a blockchain and potentially trade on a global basis.
Conceptually, the token is similar to a listed private equity fund, which trades at a discount or premium to the the value of the underlying assets.
“That is what is going to be really valuable. People can actually have a wallet of tokenized assets to retire with rather than just a traditional equity and fixed income portfolio” said Peter Hughes, founder and CEO of Apex Group. Individuals getting access to managers like KKR or Apollo “is closer to becoming possible.”