With the help of recommendations made by the public and the SEC Small Business Capital Formation Committee, the SEC announced amendments to modernize the definition of an “accredited investor,” expanding the number of investors who qualify to invest in private markets by taking into consideration more than just a person’s wealth. These amendments were adopted in August 2020 and published in the Federal Register on October 9, 2020. They will come into effect 60 days after publication on December 8, 2020.
As defined by the Securities Act of 1933, the only way a person is eligible to make an investment in private capital markets is by qualifying as an accredited investor using a simple “wealth test.” This definition of accredited investors was intended to protect unsophisticated investors in the wake of the Great Depression by prohibiting private investments by individuals unable to recover from potentially large losses. However, in the present day, this definition has excluded a large swatch of truly savvy investors (finance professionals, for example) who might possess financial sophistication but not great personal wealth.
In 2019 the SEC asked the public for comments on ways they could “simplify, harmonize, and improve the exempt offering framework.” As a result of the responses, the SEC decided to amend the definition of an accredited investor as listed here.
- Persons based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution. To start with, holders in good standing of the Series 7, Series 65, and Series 82 licenses will qualify. Others may be added later. (explanation)
- “Knowledgeable employees” of a private fund. This is defined in several ways (explanation), generally including anyone in a leadership, decision-making, analytical, or investment role with the fund.
- Limited liability companies with at least $5 million in assets (explanation), SEC- and state-registered investment advisers (explanation), exempt reporting advisers, and rural business investment companies (explanation).
- Any entity that owns “investments” in excess of $5 million and it was not formed for the specific purpose of investing in the securities offered - including Indian tribes, government bodies, funds, and entities organized under the laws of foreign countries. (explanation)
- “Family offices” with at least $5 million in assets under management and their “family clients” – those whose investments are directed by the family office. (explanation)
- “Spousal equivalents” to allow individuals to pool their finances to qualify. (explanation)
To read the full details of the Amendments, check out the full proposal, summary of comments, and final amendments in the Federal Register.
These amendments expand the group of potential investors enabling the private capital markets to reach a larger pool of potential funds, in turn playing an important role in capital formation, economic stimulation, and innovation.