The Definition of Accredited Investor and How It May Change
With so many private placement opportunities reserved only for “accredited investors,” it’s little wonder that at PENSCO, we’re often asked to define the term. Under the current accredited investor definition, determining whether or not you qualify as an accredited investor is relatively straightforward.
However, regulatory changes could expand the definition of accredited investor, opening up these alternative investment opportunities to a broader swath of the investing public.
First, let’s talk about the current definition of an accredited investor. As an individual, you qualify as an accredited investor if you meet at least one of the following criteria:
1) You earned an individual income of more than $200,000 per year, or a joint income with your spouse of $300,000, in each of the last two years and you expect to maintain the same level of income.
2) You have a net worth exceeding $1 million (not including the value of your primary residence), either individually or jointly with your spouse.
3) You are a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.*
If you meet one or more of these criteria listed above, and you want to pursue that alternative investment opportunity you’ve been eyeing, once your accredited investor status is verified, you’ll have the green light to move forward.
But changes are likely coming to the definition of accredited investor. In July, the House of Representatives passed the JOBS and Investor Confidence Act, which is also referred to as the JOBS Act 3.0. It includes 32 individual pieces of legislation, and Representative Jeb Hensarling, Chairman of the House Financial Services Committee, described the act as an effort to spur entrepreneurship by reinvigorating business startups and initial public offerings.
Part of the JOBS Act 3.0 is aimed at updating the definition of accredited investor. Here are three ways the definition of an accredited investor would change under the act:
- The criteria to qualify as an accredited investor would be expanded to take into account expertise and experience. Regardless of whether an individual meets the high net worth or income requirements, individuals who have the “education or job experience” to evaluate investment risks and merits verified by the Financial Industry Regulatory Authority or an equivalent self-regulatory organization (see H.R. 1585 section 2(a)(E)) — such as registered brokers or investment advisors with specified securities-related licenses — would be considered accredited investors.
- The net worth requirement would also change. It would be tied to inflation and adjusted every five years to the nearest $10,000.
- "Family Offices" would be considered accredited investors if their assets under management are more than $5 million; if they were not formed for the particular purpose of acquiring the securities offered, and the purchase is directed by a person with appropriate investment knowledge to evaluate the merits and risks of the proposed investment opportunity.
These accredited investor definition changes are not finalized, and the legislation must head to the Senate.
This is not the only legislation that could change the definition of accredited investor. Securities and Exchange Commission Chairman Jay Clayton said recently that the commission wants to make it easier for individual investors to invest in private companies. According to the Wall Street Journal, the SEC plans to release a paper in the coming months seeking public comment on how to revamp the capital-raising process and expand access to private stock sales.
The SEC will look for ways to streamline the process for investors to be approved as “accredited,” and seek ways to expand the pool of accredited investors by potentially allowing investors who don’t meet income or wealth thresholds but have professional licenses or advanced education to be considered accredited.
At PENSCO we’re committed to providing our clients with the most timely and relevant information possible. We’ll continue to monitor the evolving definition of accredited investor and what it could mean for the future of alternative investing.
*While this is one of the criterion for “accredited investor” status, in terms of investing in a private placement in your IRA, it would require side letters and potential other steps.
Editor’s Note: This is an updated version of a post we originally published in March 2016. We welcome new comments and questions below.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
Pacific Premier Trust (formerly PENSCO Trust Company) performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.
NOT FDIC-INSURED | NO BANK GUARANTEE | MAY LOSE VALUE