Could you pass an SEC test to invest in private assets?

If you want to access investments typically reserved for the wealthy, regulators may someday let you — provided you can pass a test.

That in itself may not be easy, considering that many consumers can’t pass a basic financial literacy quiz. But coming up with an exam that helps protect investors is also more difficult than it sounds, experts say.

Lawmakers and regulators have for years kicked around the idea of a knowledge test to become a so-called accredited investor. Accredited investors are allowed to invest in a wider range of assets, including pre-IPO companies, private credit and equity, venture capital and hedge funds.

The latest effort, which the U.S. House of Representatives approved last month, proposes having the Securities and Exchange Commission devise a test to determine if an investor has the knowledge and sophistication to understand the valuation and risk of these investments.

It comes amid a broader push to make private-market assets — that is, investments that are not publicly traded — available to more investors.

Private-market investments can be debt or equity in early-stage companies or startups, or private equity deals. Private investors owned Figma before its IPO, for example. These types of investments may offer higher returns, experts say, but they are also higher risk. 

The risks to investors can be systemic issues, like a lack of regulatory guardrails in private markets, and also unique to each individual. That’s hard to test for.

“The devil is in the details,” said James Andrus, a member of the SEC’s investor advisory committee. “It’s incredibly difficult to create such a test, and it’s unclear whether it offers substantial investor protection.”

Currently, to qualify as accredited, investors generally need an annual earned income of $200,000 for individuals, or $300,000 for married couples. Individuals or couples can also qualify with a total net worth of at least $1 million, not including the value of their primary residence.

Those wealth test thresholds are not pegged to inflation and haven’t changed since they were first developed in the 1980s. As a result, more households have become accredited over the years as wealth and incomes grow.

Licensed investment professionals can also qualify as accredited, having passed either the Series 7, 65 or 82 exams. Those tests are aimed at ensuring professionals understand how to comply with securities laws and regulations.

Financial advisors and other experts say a test for becoming an accredited investor would need to gauge understanding of different types of securities as well as the risks associated with private assets, including their limited liquidity and disclosures, subjective valuations and longer investment horizons.   

“The test would essentially need to assess whether this person has that knowledge and understanding to manage investments that do not come with a layer of professional oversight or regulatory protections to rely on,” said Yanely Espinal, a director of educational outreach at Next Gen Personal Finance.

Pre-IPO, venture capital deals typically require minimums that can reach six figures. So an understanding of diversification, risk and how this type of investment should fit into a portfolio should be required knowledge, experts say. But it could be difficult to test for that understanding, they say.

“We’ve been blessed with a lot of bull markets and high growth recently, but these things can go down and potentially default,” said certified financial planner Chelsea Ransom-Cooper, chief financial planning officer at Zenith Wealth Partners in Philadelphia. “I would just hope that whatever exams or structures are put in place are there to protect the end investor.”  

Think about what it would mean to lose $20,00 in cash savings if your annual income is $80,610 (the median in the U.S.), said Espinal, a member of the CNBC Global Financial Wellness Advisory Board.

“That would represent nearly a quarter of your annual income being lost to one investment,” she said. “That’s drastic.”

Cryptocurrency adds another wrinkle. Crypto and private market assets are both considered alternative investments, and having a test for one but not the other may offer mixed messages for investors.

“You cannot invest in a real company that happens to be private, but you can invest in something equally risky, crypto, because you don’t have the same accredited investor requirement,” said Andrus.

Depending on how it’s written, an SEC knowledge test on private markets could be challenging for many people, if broader financial literacy tests are any indication.

Take the FINRA Investor Education Foundation, which has a seven-question financial knowledge multiple-choice quiz, with questions about “fundamental concepts” including interest rates, inflation, debt and risk. More than 25,000 U.S. adults took the quiz as part of a broader financial capability study in 2024.

Only 4% of respondents answered all seven questions correctly. Less than half, 46%, answered at least four correctly, little changed from 2021. 

For example, when asked what happens to bond prices when interest rates increase — do they rise, fall or stay the same? — 42% of respondents said they didn’t know, while another 33% answered incorrectly. The correct answer is fall.

Even investors who already qualify as accredited could welcome, and benefit from, such a test, experts say.

“A lot of people with a lot of money do these deals and have no freaking clue what they’re getting into,” said Rich Diemer, the managing director of CAV Angels, a non-profit club housing an angel investment group catering to University of Virginia alumni. “They get in these deals because they know someone who’s in, or they know a group that’s in, or they heard of this unicorn or that unicorn.” 

The CAV Angels club does a lot of work educating members, he said, helping them understand how to do due diligence and assess market potential, as well as what it takes to support an early-stage company. In the case of angel investing, companies often need additional funding.

“It’s not like a one-and-done thing, said Diemer. “It’s a nursing along an early-stage company to a point where they then get handed off to VCs [venture capital firms].”

Diemer said he supports the idea of a test to help younger people, who can demonstrate the knowledge but who haven’t built enough wealth, to qualify as accredited.