The Definition of Accredited Investor Could Expand in 2020
Changes may be coming to the definition of accredited investor in 2020 that would widen the pool of investors who can invest in private market offerings—such as buying private company stock or investing in hedge funds.
The Securities and Exchange Commission has voted to propose amendments that would allow more investors to participate in private offerings by allowing certain individuals to qualify as accredited investors based on their professional knowledge, experience, or certifications.
For instance, financial professionals with the Series 7, 65, or 82 licenses would qualify as accredited investors based on their professional certifications and designations. And “knowledgeable employees” of a private fund would qualify as accredited investors for the purpose of investing in the fund.
The amendments would also expand the list of entities—like RIAs and LLCs—that could qualify as accredited investors by allowing any entity that meets an investment test to qualify.
Accredited Investor Definition Changes are Years in the Making
According to WealthManagement.com, the current definition of an accredited investor hasn’t been modified in any meaningful way since it was enacted in 1982.
In the years since its adoption, both Congress and the SEC have discussed amending the definition. Earlier this year, SEC Chairman Jay Clayton indicated the commission wanted to change the definition to make it easier for individual investors to invest in private companies.
Currently, in order to qualify as an accredited investor and participate in private market offerings—such as buying private shares or investing in hedge funds—an investor must meet at least one of the following criteria:
1) Earn an individual income of more than $200,000 per year, or a joint income with a spouse of $300,000, in each of the last two years, and that same level of income is expected to be maintained.
2) Have a net worth exceeding $1 million (not including the value of your primary residence), either individually or jointly with a spouse.
3) Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.*
Clayton has said the SEC would look for 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.
In announcing the proposed amendments, Clayton said modernization of the accredited investor definition was long overdue.
“The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication,” he said in a statement.
The proposal is now subject to a 60-day public comment period.
*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.
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