The U.S. Securities and Exchange Commission is considering new ways for individual investors to gain access to some private-market investments — including passing an exam.
The three-member commission said on Wednesday it is considering expanding the qualifiers for so-called accredited investor status. Certain investments — such as private equity funds, venture capital, and hedge funds, among others — commonly require investors to be accredited to participate.
Currently, to qualify as accredited, investors generally need an annual earned income of $200,000 for individuals, or $300,000 for married couples in each of the prior two years, with a reasonable expectation of the same income in the current year. Individuals or couples can also qualify with a total net worth of at least $1 million, not including the value of their primary residence.
"Accredited investor access to private offerings should not be solely to individuals satisfying financial thresholds," Paul Atkins, Chairman of the SEC, said at an open meeting on Wednesday.
Current SEC rules also allow accredited investor status for individuals who hold a Series 7, 65 or 82 securities licenses in good standing, among other qualifiers.
How an accredited investor exam might work
SEC officials said in the meeting that FINRA, a self-regulatory organization that oversees U.S. broker-dealers, would develop the new exam. Anyone age 18 or older would be eligible to take the test.
According to details shared in the meeting, the test would be modeled on an existing FINRA assessment for securities industry professionals: a roughly 75-question multiple-choice exam with a two-hour time limit. That existing exam costs about $100, and officials said an accredited investor test could have a similar price tag. It could be administered at testing sites across the country.
If a candidate passes the exam, the results would be valid for 10 years, after which the individual would have to retake the test, or qualify under another part of the accredited investor definition.
The proposed accredited investor test aims to gauge someone's comprehension and sophistication about the structures of securities, investment risks, disclosures and regulatory requirements, SEC officials said.
FINRA declined to comment on questions the test might ask. In a subsequent emailed statement to CNBC, the organization said it encouraged people with views on the proposal to share them with the SEC.
What private-market access means for investors
The SEC's new proposals are part of the Trump administration's push to increase access to alternative investments. Alts are a broad category that includes real estate, cryptocurrencies and private market assets such as private equity and private credit.
Proponents say opening access to alternative investments could provide investors with greater diversification and potentially higher returns.
"I think the goal is to recognize that there is a universe much larger than is met by the current standard," said Mitchell Caplan, CEO and Chairman of New York-based private investment firm Willow Wealth. He said young people who may have the knowledge but not the income or net worth to qualify as accredited under current rules should not be kept out of private investments.
"You don't prevent access. That's not the solution. The solution is you provide access with education and guardrails," he said.
Others are skeptical that more retail investors should be encouraged to invest in private assets, which come with more complexity, less liquidity and higher fees compared to public investments.
"The private funds industry kind of needs new investors as the institutional investors that have long invested in private funds scale back, and so they are desperate to get their hands on the retirement savings and other savings of retail investors, but that doesn't mean they should," said Benjamin Schiffrin, director of securities policy at Better Markets, an independent, non-profit organization supporting financial reform.
A test that's 'tough enough to defend'
Some financial literacy experts say understanding the investments themselves is just one component — it's also important for regulators to test investors' understanding of their capacity to withstand losses.
"If we focus on a test that just tests financial jargon, but then ignores the capacity piece, sure, we can claim that we're making this more accessible, but ultimately, at what cost?" said Yanely Espinal, senior vice president of educational outreach at the non-profit Next Gen Personal Finance and member of the CNBC Global Financial Wellness Advisory Board.
Developing the test can be politically tricky. "It needs to be tough enough to defend politically if the public gets upset because of losses in private markets," Jaret Seiberg, a policy analyst for TD Cowen research, wrote in a policy note on Wednesday.
"Yet it also cannot be too tough as the SEC wants more people to qualify," he wrote.
The SEC is also considering designating certified public accountants, certified financial planners and chartered financial analysts in good standing as qualifying credentials for accredited investors.
There will be a 60-day period where the public can comment on the proposal. TD Cowen analysts expect the SEC could issue a final order in the spring of next year.
