Increased possible access of retail investors to private funds by the SEC - could tokens contribute positively?
The Securities and Exchange Commission (SEC) has proposed changes to the rules for retail investors in closed-end funds, a move that could significantly accelerate the tokenization of closed-end funds and private market assets.
The proposed changes include removing limits on these funds' investments in private funds and easing restrictions on retail investor participation, making it easier for retail investors to invest in private markets. Historically, closed-end funds that invested more than 15% in private funds had to restrict ownership to accredited investors and impose a $25,000 minimum subscription. However, the SEC staff's new stance no longer enforces these restrictions.
This regulatory shift opens up the possibility for broader retail investor participation and diversification. The SEC seeks to increase retail investor access to private funds through registered closed-end funds, which are subject to enhanced reporting and oversight, thus potentially making tokenized fund shares appealing to retail investors who can now diversify in illiquid/private assets with smaller amounts.
The advantages of tokenization are particularly clear for asset managers facing operational challenges when managing thousands of smaller investors. For instance, managing thousands of $1,000 retail positions is much easier with smart contracts than traditional fund administration.
The SEC's emphasis on transparency and disclosure also creates an environment where tokenized investment vehicles can comply with regulations more easily, supporting greater retail adoption. Enhanced portfolio reporting, liquidity risk management reporting, and attention to conflicts of interest, fees, and fiduciary duties, ensure that tokenized securities can meet regulatory requirements.
The growing interest in tokenizing private assets intersects with this regulatory shift. State Street published a survey in mid 2024 finding that 64% of institutions believe private equity is the most likely asset to be tokenized. Major private market players like Apollo Global (AUM $781 billion) and Hamilton Lane (AUM $956 billion) are moving toward tokenized structures. Two other private market investors, Apollo Global and Hamilton Lane, are adopting tokenized structures.
Younger investors are more likely to invest in alternative assets compared to older investors, according to a survey by Bank of America. Fans of alternatives outnumber crypto proponents among younger investors. The fractionalization enabled by tokenization helps to lower the minimum investment amount, benefiting even wealthier investors looking to diversify their portfolios.
Commissioner Uyeda previously suggested a similar topic, stating that a diversified portfolio could help address the risks. In a speech last week, Commissioner Uyeda repeated this suggestion. Chair Atkins stated that this regulatory shift would give all investors the ability to seek exposure to a growing and important asset class.
While expanded retail access is likely a net positive for tokenization, the nuances of any new rules will need to be considered. The Monetary Authority of Singapore opened a consultation in March, indicating a similar regulatory shift in that country. This regulatory shift could potentially benefit tokenization, as it could provide retail investors with access to private assets. Industry anticipation and preparation are high, with firms preparing new fund structures tailored for retail investors that can leverage tokenization technologies to handle compliance and investor servicing demands, expected to surmount traditional distribution challenges.
- The SEC's proposed changes in closed-end fund rules could significantly accelerate the tokenization of closed-end funds and private market assets, offering increased retail investor participation and diversification.
- The SEC seeks to increase retail investor access to private funds through registered closed-end funds, makes it appealing for retail investors to diversify in illiquid/private assets with smaller amounts.
- The advantages of tokenization are particularly clear for asset managers, as managing thousands of smaller investors becomes much easier with smart contracts instead of traditional fund administration.
- The SEC's emphasis on transparency and disclosure creates an environment where tokenized investment vehicles can comply with regulations more easily, supporting greater retail adoption.
- State Street's survey found that 64% of institutions believe private equity is the most likely asset to be tokenized, and major private market players like Apollo Global and Hamilton Lane are moving toward tokenized structures, indicating the growing interest in tokenizing private assets.
