The Securities and Exchange Commission (SEC) is modifying its previous definition of an accredited investor, expanding the definition beyond the financially-based requirements. The agency originally announced its plans to modify how to become an accredited investor in December 2019.
Previous Criteria to Qualify as an Accredited Investor
Accredited investors in the United States are permitted by the SEC to invest in particular types of simplified securities under Regulation D. Previous definitions hinged on the income and net worth tests, which did not take the financial sophistication of the investors into account. The previous criteria included income test of $200,000 USD per year (300,000 USD with a spouse) in the previous two years or $1 million USD in net worth.
Expanding the Definition of Accredited Investor
The expansion of the accredited investor definition criteria is the result of years of work by the SEC and its personnel to evaluate various approaches to modifying the definition.
Professional Certifications, Designations or Other Credentials
The new definition of accredited investor will enable individuals to qualify based on their professional credentials, certifications, designations, or other credentials delivered by an accredited educational institution. At the SEC’s discretion, the educational institutions mentioned can be added to in the future.
Additional Expansions
Further expansion of becoming an accredited investor includes “knowledgeable employees” of private investment funds and family offices that include at least $5 million in assets under management. Additional entities may now also be considered accredited investors, including certain investment advisors, limited liability companies, and rural business investment companies.
In conjunction with its release of the new rules, the SEC asked the public whether the income and asset tests to determine accredited investor status should be changed in light of factors such as geography, inflation, and any others. In response to the comments received, the SEC decided not to modify the financial criteria established nearly 40 years ago.
Knowing how to become an accredited investor and how to handle the opportunities available in a financially responsible manner is important. The SEC rules are in place to help ensure only individuals qualified to take certain financial risks can do so.
