SEC Updates Definition of Accredited Investor, Opening the Door to Greater Participation in Private Equity Investments
“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.”– SEC Chairman Jay Clayton
One of the stipulations for becoming a member of VisionTech Angels’ Indiana-based investing network is that one has to be an accredited investor per guidelines set forth by the Securities and Exchange Commission (SEC). The purpose of these guidelines is to establish protections to ensure individuals have the resources and financial capacity to take the losses typically associated with these types of private equity investments.
Among the guidelines for being an accredited investor is a net worth of at least $1 million excluding the value of one’s primary residence, or income of at least $200,000 each year for the last two years or $300,000 combined income if married. Meeting this income threshold allows one to participate in private equity investments, including those made by angel investing groups like VisionTech Angels, regardless of financial or business sophistication.
Many have complained about this and rightfully so. One pundit pointed at lottery winners who become overnight millionaires based on buying a $2 ticket and picking the right numbers. Under the old SEC guidelines, the lucky and now wealthy person had achieved financial sophistication based on good fortune and now qualified to be an accredited investor.
To their credit, the SEC has considered and analyzed approaches to revising the accredited investor definition for years. Finally, on Wednesday, August 26, the Commission adopted amendments to update and improve the definition of accredited investor in its rules. The amendments add new categories of qualifying natural persons and entities and make certain other modifications to the existing definition. The SEC’s goal is to simplify, harmonize, and improve the exempt offering framework, thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.
In their official statement, the SEC said, “We do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”
Here are the amendments to the accredited investor definition in Rule 501(a). NOTE: The financial thresholds remain one characteristic of an accredited investor:
- Add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials, including the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. (The Commission will 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);
- Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries;
- 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.
SEC Commissioner Hester Peirce tweeted Wednesday: “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.’”
This is good news and long overdue. I am excited because this opens up VisionTech Angels, a group that places a premium on the knowledge and experiences of our members, to a far broader group of people with an interest in creating wealth and opportunities by investing in and mentoring startup companies. Our group is 125 members strong, and my hope is that the SEC’s ruling will open the door to greater participation to those who have been forced to sit on the sidelines.
Read the Securities and Exchange Commission press release here.
VisionTech Angels is among the Midwest’s largest and most active angel investing groups. To learn more about our group, investing focus and portfolio, visit our website here. To schedule a call or Zoom with me, email email@example.com.