By: Nadiya Waterloo, CISP, CSDIP, Vantage Team Lead
You have likely come across the term “accredited investor” in your search for private alternative investment opportunities.
Being an accredited investor allows you to access investments, such as private equity investments, venture capital funds, or private placements.
Historically, an investor had to meet net worth and sophistication standards set by the U.S. Securities Exchange Commission (SEC) to be considered an accredited investor. Although the definition for net worth was well outlined, there wasn’t an established, clear measure for financial sophistication. This often meant that investors who did not meet net worth standards were denied the opportunity to invest in private markets regardless of their financial sophistication.
On August 26th, 2020, the SEC officially adopted a new definition.
The SEC acknowledges that the modification is to identify individual and institutional investors who have the knowledge and expertise to participate in private offerings without regard to their financial resources.
The new definition now includes individuals who:
- Are “knowledgeable employees” of private funds and extends to the spouses of knowledgeable employees with respects to joint investments;
- Have professional certifications, designations, or credentials designated by the SEC Commission and issued by an accredited educational institution (e.g., Series 7, Series 65, and Series 82 licenses qualify)
- Qualify as spousal equivalents, which encompasses any cohabitants occupying a relationship generally equivalent to that of a spouse, opening the option to pool assets to qualify as accredited investors under net worth and income tests.
It also modifies the definition for entities qualifying as “accredited investor” to include:
- LLCs with $5 million in assets;
- Family offices with $5 million in assets under management (and family clients);
- SEC-and state-registered investment advisers and exempt reporting advisers;
- All entities with $5 million in investments, including Rural Business Investment Companies (RBICs).
The SEC has accepted the general principle that “sophistication” can make someone an accredited investor and will allow financially savvy investors to expand their participation in private offerings.
The new definition will become effective sixty (60) days following its publication in the Federal Register, which has not taken place yet. The anticipated effective date will be sometime in early November 2020.
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