SEC Changes Needed for Tokenization to Expand Retail Private Market Access
Tokenization in the retail sector has the potential to revolutionize private market access for investors, provided there are changes in the regulations set by the Securities and Exchange Commission (SEC). While traditional financial institutions like Apollo, State Street Global Advisors, and Virtus have already developed strategies to make private markets more accessible to retail investors, newer players like Robinhood are also entering the fray to democratize access to private assets such as real estate, venture capital, and private credit through fractionalized ownership.
Robinhood, known for its trading and investment platform catering to individual investors, is exploring tokenization technology to address the issue. However, the existing accredited investor rules in the U.S. serve as a significant barrier. These rules determine which individuals are considered “sophisticated” enough to invest in products that are not registered with the SEC. Robinhood’s Chief Brokerage Officer, Steve Quirk, emphasized the need for regulatory dialogue to challenge the accredited investor rules that currently exclude a vast majority of the population from participating in real estate and other private asset investments on a fractional basis.
Quirk highlighted the firm’s engagement with the SEC to push for changes in the accredited investor definition while upholding safety and suitability standards. Following former chair Gary Gensler’s departure, acting SEC chair Mark Uyeda acknowledged the need to reevaluate the criteria for accrediting investors and expanding access to private investments. Uyeda questioned whether the current income and net worth thresholds are adequate and whether individuals who do not meet accredited investor criteria should be entirely barred from private offerings or allowed limited exposure through a scaled approach.
While the SEC revised the definition in 2020 to include registered brokers and investment advisors, further amendments are necessary to broaden private investment opportunities. Currently, the SEC imposes restrictions on the number of individuals who can invest in private companies before their initial public offering. Quirk advocates for opening up private investments to a wider demographic, particularly younger investors, who represent a significant segment of the population interested in exploring the private market.
In conclusion, the implementation of tokenization technology holds promise for expanding retail access to private markets, but legislative changes and amendments to accredited investor rules are imperative to overcome existing barriers. By fostering dialogue between financial entities, regulatory bodies, and lawmakers, the path towards a more inclusive and diversified investment landscape for retail investors can be paved.
