Before we dive into what changes the SEC made to the definition of what an “accredited investor” is and how this may benefit you, let’s first discuss what the term means. The Securities & Exchange Commission has rules around what Americans are allowed to invest in and, until recently, these regulations were primarily built around how much you were worth. They defined an “accredited investor” as someone who makes at least $200,000 annually ($300,00 with a spouse) or who has a total net worth of $1 million or more (not including your home). If you met this definition - you could grow your wealth by investing in whatever you wish.
However, if you do not meet these financial thresholds (and according to Federal Reserve data only about 12 million US households do), then you were limited in your choices of where to invest your hard earned money.
So let’s break this down….
So why create these separate investor categories? The SEC deemed accredited investors as individuals and entities that are considered financially proficient and therefore allowed them access to a greater range of investment opportunities including those that may present more risk -- while also presenting potential for a greater reward. These investors, because of their assets and presumed knowledge, are believed to be able to take advantage of a wider range of investment options due to their financial status.
Those with special knowledge, such as a general partner, executive officer, or director for a company issuing unregistered securities were also considered accredited investors.
So you can see from the criteria above, most investors truly classify as non-accredited investors based solely on their stash of cash. However, money doesn’t always equal financial intelligence.
So when it comes to the ability to invest, why should financial status be the primary determining factor when it comes to investment possibilities?
This was part of the question the SEC looked to answer in August 2020, when they reviewed and expanded the definition of “accredited investor” in Rule 501(a). This created an amendment that opened up investment opportunities once reserved only for those who fell within certain income and net worth brackets to now include those who can demonstrate a certain level of financial intelligence. This change means that those with specified certifications, designations, or credentials, as outlined by the Commission, will now be able to engage in an expanded range of investments, including private offerings as well, not just those that meet certain income and net worth criteria.
In a release issued by the SEC, Chairman Jay Clayton said: “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations, that may qualify to participate in certain private offerings.”
Why does this matter?
This definition update is really great news for those who are financially savvy and who have wanted to take advantage of opportunities in the private market or alternative investments (such as real estate, venture capital, art and antiques, etc.) that were once limited to those with significant financial assets, a.k.a. a big stash of cash. This update also reflects a more modern attitude that may open the door to younger investors who may not have the financial assets to qualify, since those take time to acquire, but who can demonstrate a level of financial knowledge based on education.
The bottom line.
At the end of the day, the SEC isn’t tracking down every single investor to qualify individuals as accredited or not. There is no paperwork, formal process, or application to fill out that grants you “accredited investor status”. It’s largely self-governing and the entity that issues the investment offering can take different measures to validate those wishing to make an investment.
While making investments in private (ie., unregistered securities) or other options that present a higher risk and the possibility for a greater reward may not be for everyone, the updated accredited investor definition now allows for individuals and other entities to have more of a say where they choose to invest their money. Lastly, it shows that wealth is not only how many zeroes you have in your bank account, but that knowledge is power too!
Let us know your thoughts about this SEC update. Does this impact you and your ability to invest? Have you considered expanding your investment options?
