SEC Alters Rules for Accredited Investors—Do You Qualify Now?

SEC Alters Rules for Accredited Investors

The new definition of accredited investors gives more Americans access to private investment opportunities.

Many people have been unable to invest in high-yield private ventures simply because of the Securities and Exchange Commission’s (SEC) definition of “accredited investor,” which limits the opportunities available to many investors based on the capital they have at their disposal and relatively arbitrary “net worth” considerations.

This is about to change, as the SEC announced a revision to its definition of “accredited investor” so that more Americans can gain access to private investment opportunities.

In a recent press release, SEC Chairman Jay Clayton announced that “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth but also based on established, clear measures of financial sophistication.”

This expanded accredited investor definition will allow more people to invest in securities beyond the familiar fare of public stocks and bonds, accessing diverse opportunities typically reserved to institutions and funds. You may be wondering if you can take advantage of these new rules. Here’s what you need to know.

What’s an Accredited Investor?

An accredited investor is an individual or a business entity that’s allowed to invest in private market securities offerings. Accredited investors are entitled to this privileged access by satisfying at least one requirement on income, net worth, asset size, governance status, or professional experience.

In the U.S., the term is used by the SEC to refer to investors who are financially sophisticated and have a reduced need for the protection provided by the liquidity in the public securities markets. They can include individuals with high net worth, banks, insurance companies, brokers, and trusts, and, now, certain individuals with certain professional experience and those who choose to invest through an LLC or other entity structure.

Are You Qualified as an Accredited Investor According to SEC’s New Rules?

The existing SEC rules for individual investors, which are based primarily on income and net worth, meant that approximately 85% of the U.S. population couldn’t invest in private companies because they didn’t meet the previous accredited investor rules. This included qualifying through one of the following definitions:

  • A natural person who earned income that exceeded $200,000 USD (or $300,000 USD combined with a spouse) in each of the prior two years and reasonably expects the same for the current year
  • A natural person who has a net worth over $1 million by themselves alone or together with a spouse (excluding the value of their primary residence)

While these two definitions of an accredited investor are the most well-known, there are additional categories of accredited investors including:

  • Any trust with assets that exceed $5 million USD in total and has not been formed specifically to purchase the securities in question and whose purchase is directed by a sophisticated person
  • Any entity in which all of the equity owners are accredited investors

In this context, a sophisticated person means this person must have (or the company offering the security must reasonably believe this person has) sufficient knowledge and experience in finance and business to appropriately evaluate both the merits and risks of the prospective investment.

Under the old rules, not only are certain people denied investment opportunities, but high-growth private ventures are deprived of a rich source of capital.

“This is a big deal,” says Jeff Thomas, chairperson and professor of the entrepreneurship department at Central Michigan University, about the new rules. “Until now, the accredited investor definition has completely ignored the financial sophistication of individual investors.”

Here are the changes that have the most impact on individual investors seeking to broaden their portfolios:

Individuals with Professional Qualifications

Anyone—regardless of income or net worth—who holds Series 7, Series 65, or Series 82 licenses from the Financial Industry Regulatory Authority (FINRA) and is in good standing is now considered an accredited investor. The SEC can and expects to add more qualifications to this new list, but as of now, only individuals holding the licenses above can qualify.

Limited Liability Companies (LLCs)

LLCs can now officially qualify as accredited investors, irrespective of whether their owners qualify individually, if they meet these two criteria:

  1. Have total assets in excess of $5 million.
  2. Were not formed for the specific purpose of buying shares in the offering in which they are looking to invest.

As such, the management and owners of an LLC can consist or be composed entirely of non-accredited investors, and the LLC can still be considered an accredited investor if it’s registered as the holder of the shares in the investment it is making.

The Catch-All Category

The SEC created this catch-all category to remove any ambiguity or the need to list every type of business that can be defined as an accredited investor. 

According to this definition, any entity regardless of its form (corporation, charitable foundation, limited partnership) that meets the following criteria can qualify:

  1. Has in excess of $5M of assets held as investments or to be used for investment purposes.
  2. Was not formed for the specific purpose of buying shares in the offering in which they are looking to invest.

The assets of the entity must generally be composed of securities, real estate, commodity interests, physical commodities, and financial contracts held for investment purposes. They can also be cash or cash equivalents intended to be used for investment purposes.

Family Offices and Their Clients

According to the SEC, “family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Family offices will now be deemed to be accredited investors if they:

  1. Hold at least $5M in assets under management.
  2. Were not formed for the specific purpose of buying shares in the offering in which they are looking to invest.
  3. The individual at the family office making the investment decision is a sophisticated person based on reasonable diligence conducted by the issuer in the offering. 

The Calculation of Net Worth

An individual’s net worth or income is one of the key criteria for qualifying as an accredited investor. 

While the SEC’s definitions have always permitted the inclusion of a spouse’s income and net worth to determine whether someone meets the accredited investor definition, the new rules further clarify that this flexibility will now be extended to cover cover homosexual and unmarried relationships, or, more formally, “cohabitants occupying a relationship generally equivalent to that of a spouse.” 

Lifeafar gives individual accredited investors, family offices, and private funds the opportunity to partake in the ownership of international real estate and agriculture projects with a stable value proposition and a high potential for appreciation that have traditionally been reserved for large institutions.

Our entrepreneurial and boots-on-the-ground approach to identify and structure these opportunities are both attractive to our investors and seen as a value-add to the communities where they are located.

If you are interested in learning more, please visit our investment opportunities or contact us directly using the form below

Leave a Comment

Your email address will not be published.


You might also like...

Loading...