The U.S. Securities and Exchange Commission said Wednesday that it has expanded the definition of an “accredited investor,” allowing people with professional knowledge, experience or certifications to qualify as accredited investors.
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The new amendments to the accredited investor definition also increases the list of entities that can qualify as accredited investors.
“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,” SEC Chairman Jay Clayton said in a statement. “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.”
Previously, the SEC rules defined an accredited investor as someone who earned more than $200,000 annually for the past two years or more than $300,000 combined with their spouse. It also included people who had an individual or combined net worth of more than $1 million, excluding the value of their home.
The rules governing accredited investors are designed to protect individual investors. They’ve operated on the idea that the private markets are riskier and less transparent than public markets and that only higher net-worth investors should thus be able to participate. But the regulations have also drawn criticism for being too exclusionary and keeping investment opportunities among the wealthiest people.
Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them “no, unless you’re rich”: https://t.co/uP9zo8pVkZ
— Hester Peirce (@HesterPeirce) August 26, 2020
The SEC expanded the definition of “Accredited Investor”
Now allows ppl w/ Series 7, 65, and 82 to invest in private capital markets. Nice, but not meaningful imo. Anyone can gamble away their $ in vegas or $BTC etc. but not invest in early stage cos 🤷🏽♂️https://t.co/uOpPnBjbbP
— Sheel Mohnot (@pitdesi) August 26, 2020
Now, the amended SEC regulations adds a new category that qualifies people as accredited investors “based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution,” according to the statement.
The agency has also expanded the qualifications to invest in a private fund to people who are “knowledgeable employees” of the fund, clarifies that LLCs with at least $5 million in assets can be accredited investors, and says that any entity and any family office with at least $5 million in assets can be accredited investors. The term “spousal equivalent” is also added so that spouses can combine their finances to qualify as accredited investors, per the statement.
Illustration: Li-Anne Dias