As an investor, you may have heard that the SEC recently modernized their definition of accredited investor. In this article, we give an overview of what's changed to the definition, and what's stayed the same. Read on to learn more!
Accredited investors are those individuals and business entities who are entitled to trade securities that may not be registered with the SEC. The official definition of an accredited investor is someone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
The update expands on the definition to fill in on areas that were previously left vague or unclear, including amendments made to Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
Changes to Rule 501(a):
Updated to include qualification based on certifications, designations, or credentials. Holders in good standing of Series 7, Series 65, and Series 82 licenses will now qualify as accredited investors. The SEC identifies individuals with financial literacy in these areas as knowledgeable enough to make wise investment decisions.
Updated to allow "knowledgeable employees" to qualify as accredited investors. The SEC recognizes that individuals who work in roles where investing competence is required should be able to utilize this knowledge to make investments in their company's private fund.
Updated the list of qualified entities to include limited liability companies (LLCs) and "family offices" with at least $5 million in assets to qualify as accredited investors. While no single person in these companies may qualify as accredited, the company may invest as an entity.
Allows the ability to add a new category for any entity - Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments” in excess of $5 million.
Updated to be more inclusive, adding the term "spousal equivalent." This update ensures that spousal equivalents may pool finances together in order to qualify as accredited investors.
Change to Rule 215:
- Replaces the existing definition with a cross reference to Rule 501(a).
Change to Rule 144A:
Updated to include LLCs and RBICs if they have $100 million or more in securities owned.
While no changes were made to the minimum wealth or income levels required to be an accredited investor, the changes still expand the number of qualified individuals and entities. The updates will become effective on October 25 or 60 days after publication in the Federal Register.
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