What is an Accredited Investor?

Have you ever tried to get into an exclusive country club, but when you got to the door you were turned away because you didn’t meet the dress code? Surprisingly, there’s a similar dynamic in the financial regulatory landscape. Did you know you need to be eligible for certain investment opportunities? The U.S. Securities and Exchange Commission (SEC) has created a regulatory standard for the minimum qualifications needed to participate in those investments. This status is called an “Accredited Investor”.

The great news is that the requirements for an accredited investor are about to change! Here’s an overview of the prior regulatory standard and the changes to know whether you’re affected.

An accredited investor is a high-net worth individual, bank, financial institution, or corporation. with special status under the U.S. Securities and Exchange Commission (SEC). They may participate in more sophisticated investment opportunities that are not available to the general public. Examples would be direct investments in private companies, private equity funds, hedge funds, and venture capital funds. The rules are intended to screen investor prospects that have the requisite sophistication and capital to allocate into sophisticated investment structures.

According to the SEC, in order to be considered an accredited investor, you must meet one of the following criteria:

  1. Income: If you have made $200,000 as an individual (or $300,000 as a married couple) for the past two years, and you expect to make as much in the current year, you can be considered an accredited investor.
  2. Net Worth: Has a net worth over $1 million, either individually or together with a spouse (excluding the value of a primary residence).

The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.

Amendments to Accredited Investor

On Aug. 26, 2020, the SEC announced some changes to broaden its definition of “accredited investor”. Until now the criteria has been primarily based on financial means (net worth or income) with a few exceptions. Although, the previous financial criteria has not gone away, the amendments to the SEC’s rules opens the door to a new group of investors based on financial sophistication regardless of wealth. Investors that have industry knowledge, expertise, and professional credentials will now be awarded with opportunities previously restricted. The amendments are as follows:

  1. Professional Investors: Individual investors with certain professional certifications – specifically the Series 7, Series 65 and Series 82 licenses – will now be considered accredited investors regardless of their net worth.
  2. Knowledgable Employees: The SEC now allows people who are “knowledgeable employees” of private funds to become accredited investors. This allows private funds to offer equity to employees regardless of their net worth, and includes directors, trustees, general partners and executive officers like presidents and vice presidents. In addition, any employees who “have participated in the investment activities of such (a) private fund for at least 12 months,” excluding those whose work is solely clerical, secretarial or pertains to administrative functions, now qualify as accredited investors.
  3. Limited Liability Companies (LLCs): LLCs with $5 million in assets can be considered accredited investors. This includes SEC- and state-registered investment advisors, exempt reporting advisers, and rural business investment companies (RBICs) are added to the list of entities that qualify as accredited investors.
  4. Investments worth $5 Million: Any entity that owns investments worth $5 million or more, such as an Indian tribe or government body, can be considered an accredited investor.
  5. Family Offices: Family offices with at least $5 million in assets under management are now considered accredited investors.
  6. Spousal Equivalent: Spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.” Though the SEC already defines the term “spouse” to encompass same-sex marriage, this new definition includes domestic partnerships and civil unions.

Prior to these amendments the criteria to become an accredited investor has been like an exclusive “country club” for the wealthy, but the new rules allow for new “memberships”.

The Amendment effective date is 60 days after published in the federal register, meaning that it will become effective sometime after October 31st, 2020.

Whether you are an accredited investor or looking to diversify your portfolio give Yieldi a call so we can tell you about our offerings and why our investors keep reinvesting their profits. No membership needed!

See some of our current open offerings, here.