SEC Expands the Accredited Investor Definition — Are We Any Closer to Leveling the Playing Field?
Last week the SEC adopted a long awaited amendment to the “accredited investor” definition, first adopted in 1982. This is important because it expands the standards on who is eligible to participate in private market investments. Rather than relying solely on financial wealth standards, the new amendment allows access to these markets for institutional and individual investors that have certain “knowledge and expertise,” along with those meeting a net worth criteria based on the existing rules. However, this “expansion” is still quite restricting. It only includes those who have a Series 7, Series 65, and Series 82 license with the “flexibility to reevaluate.”
Historically, the majority of people have been kept out of private markets due to income, net worth or fund minimum requirement. Private markets were deemed “too risky” for the average person. These off-limit private markets have been a massive revenue generator for Venture Capital Firms, Angel Investors, Family Offices and Private Equity firms that most others have missed out on. This is because early investors who invest in private funding rounds purchase stock at a much lower price than what’s available to the public once a company IPOs or “goes public.” For every IPO that happens, millionaires are made many times over and the rich continue to get richer.
The rise of “democratized” funding platforms like AngelList syndicates and Kickstarter created more pressure for the SEC to revisit these rules. These platforms gave the “average” person more financial autonomy and a taste of being able to put their money in previously inaccessible investments.
Unfortunately, having a green light from the SEC to invest is only the first step in gaining access to the private markets. The investment world is close knit and most of the best companies have oversubscribed rounds that you’ll never hear about (hence why Initial Coin Offerings are interesting). It’s certainly a start nonetheless but we have many iterations of this definition to go before the playing field is truly leveled.
Here’s a summary of the new amendments to Rule 501(a) of the Securities Act.
Added a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.
The Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.
Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund.
Clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify.
Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51–1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.
Add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.