The Expanded Definition of “What is an Accredited Investor?

Right now, in November 2020, what is an accredited investor? Near the end of August of 2020, the SEC approved amendments changing the definition of accredited investor. This modified definition allows certain securities purchasers with particular professional expertise and financial knowledge to be recognized as accredited investors, regardless of their net worth or income.

These changes, which become effective on December 8th, 2020, will expand opportunities for individuals with particular financial sophistication along with other entity investors.

Individual Investors

Previous to the modified definition, individuals could qualify as accredited investors with an earned yearly income greater than $200,000 USD for the previous 2 years or greater than $300,000 USD with a spouse; or with a net worth greater than $1 million USD (minus the value of a primary residence).

For individuals, two new categories are included in the definition of what is an accredited investor. First, certain professional designations, certifications, or credentials may allow the SEC to recognize one having this status. With these amendments, the SEC also has the flexibility to change or add to the designations, credentials, and certifications continually per future orders from the SEC.

The other new category for individuals being recognized as accredited investors includes “knowledgeable employees” of a private fund as defined in the Investment Companies Act, Rule 3c-5(a)(4). These individuals may be deemed accredited investors for fund-related investments only.

Entity Investors

The amendments confirm that LLCs having more than $5 million in assets may be considered accredited investors. Other entities that may be recognized as accredited investors now include rural business investment firms, state and SEC-registered investment advisors, and exempt reporting agencies.

The SEC added another category covering entities, funds, or governmental bodies created under foreign countries’ laws, including Native American tribes. Only if, these organizations or funds were not developed to obtain the securities offered. They must also own investments in excess of $5 million per the Investment Company Act, Rule 2a51-1.

The family office is yet another entity recognized by the SEC under the definition of what is an accredited investor. These family office entities are started by families to help plan for their family’s financial future, manage their assets, and deliver other services to family members.

With the expanded definition of accredited investors provided by the SEC, many more people and entities can now participate in this previously more exclusive world of investments.

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