Today (August 26, 2020) the Securities and Exchange Commission announced changes the definition of “Accredited Investor.” For those who like to read SEC Rule releases, find the final rule here. The thought has been that this allusive status of “accredited investor” has stomped on the little guy for years; keeping him and her out of lucrative investments in start-up or private companies. Historically, individuals who wanted to invest in a private company had to meet specific income or net worth tests, regardless of their financial sophistication, to meet the test to be an “accredited investor.” The theory behind this status is that accreditor investor status exists to prevent private companies and people raising money for private companies from selling stock to everyday people directly without providing full, accurate and complete disclosure. This doesn’t mean non-rich people cannot buy stock in private companies. It means that if a private company wants to sell its stock to non-rich people, that company will need to provide a great deal of information to all of the buyers in order to do. The amount of information required to be able to sell to a large group of non-accredited investors is voluminous and is expensive to pull together (lawyers need to do it and they come cheap). The thought has always been that those who can qualify as an accredited investor: (1) can afford to lose their investment and (2) have enough sophistication and financial understanding to fend for themselves when making a decision to invest in a private company. Basically, with accredited investor status, the government has created a bright-line test that says who needs to be protected when making investment decisions and who does not.
These changes allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. In addition, the SEC also expanded the list of entities that may qualify as accredited investors. These changes to the accredited investor definition are:
- People who have certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution may now qualify as accredited investors. The change lets the SEC pick which designations will qualify. As of now holders in good standing of the Series 7, Series 65, and Series 82 licenses qualify as an accredited investor. In the future the SEC might designate other credentialed professionals as accredited investors.
- With respect to investments in a private fund, a person who is “knowledgeable employee” of the fund can now be an accredited investor;
- Limited liability companies with $5 million in assets may be accredited investors;
- SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) are now included to the list of entities that can qualify as an accredited investor;
- Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” in excess of $5 million can qualify as an accredited investor;
A “family office” with at least $5 million in assets under management and their “family clients” can be accredited investors; and
In addition to the changes above, SEC has expanded the definition of “spouse” to include a “spousal equivalent” so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. This change reflects changes in how American households now live, with marriage no longer the default requirement to consider multiple people’s income and wealth in the definition of accredited investor.
While these changes where released today, they won’t become law for another 60 days.
So, if you qualified as an accredited investor before today, you still qualify and can make investments in private companies (after doing your homework). If you are one the lucky people that falls into one or more of these new or expanded categories, you too can qualify as an accredited investor and make investments in private companies (after doing your homework).
Do these changes open the flood gate for everyone to be able to invest in private companies? No. But they expand the landscape a little so more people can at least have the opportunity to do so (after doing your homework).
