Those familiar with investing in the growing private markets likely understand the term “Accredited Investor”. As a brief overview, anyone wishing to invest in private companies or investment funds must be an Accredited Investor, as delineated under Rule 501(a) of Regulation D of the Securities Act of 1933 and other important federal and state securities law exemptions.
Since 1985, these categories have been limited to high net worth individuals or entities that range from certain types of institutional funds, banks, venture capital firms, or key insiders of the company. Under the former rules, for a natural person to qualify as an Accredited Investor, they must have (i) a net worth over $1,000,000 (not including the value of their primary residence), (ii) individual income in excess of $200,000 in each of the two most recent years, or (iii) joint income with that person’s spouse above $300,000 in each of the two most recent years and a reasonable expectation of reaching the same income level in the current year. In theory, the asset threshold means that Accredited Investors can bear the economic risk commonly present in the private market and be capable of fending for themselves.
For decades, these regulations have acted as a bar for individual investors wishing to participate in the private markets unless they met the net wealth requirement. The former definition of an Accredited Investor seemingly tied high net worth to financial sophistication. For many, this felt as though the regulations failed to distinguish between wealth and ability.
However, after years of debate, the SEC unveiled new rules last week, which qualifies natural persons by adding categories tied to “financial sophistication” and provides eligibility to persons based on professional knowledge, experience, or certifications. Under the new rules unveiled last week, the SEC amends the definition of an Accredited Investor as follows:
- Adds individuals who hold SEC Series 7, Series 65, and Series 82 licenses with a possibility that additional certifications, designations, or credentials may be added over time;
- Adds “knowledgeable employees” of private equity and venture capital funds for investing in the fund;
- Adds “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
- Adds “spousal equivalent” to the accredited investor definition. Investors and their spouses (or their equivalent partners) may pool their finances to qualify as an Accredited Investor.
Although these changes provide a notable shift toward distinguishing financial sophistication from wealth, the SEC acknowledges that these changes are not expected to create a significant number of newly eligible individual investors. Additionally, the SEC does not expect the amount of capital invested by such newly qualified individual investors to have meaningful effects on the private offering market as a whole.
If you have questions about Accredited Investors or capital investments, please give me a call.