The Great Debate: Accredited Investor Definition

Generally, a sale of securities must be registered with the SEC. However, there are cases when exemptions apply. One of these exemptions is selling securities to Accredited Investors.

An Accredited Investor is a term the SEC uses to distinguish investors who are qualified to make riskier investments, such as in hedge funds or in start-ups. According to the SEC, an Accredited Investor should meet one of the following common SEC accreditation requirements:

• High Net Worth: The investor must have a net worth of over $1 million with or without a spouse, not including one’s primary residence.

• High Income: The investor must make at least $200,000, or $300,000 with a spouse’s income, for at least two years and with an expectation of continuing high income in the future.

• Certain Professionals: The investor holds a Series 7, Series 82, or Series 65 license, or is a “knowledgeable employee” of a private fund, or is an executive or director of the issuer of the securities being offered or sold.

If one of these doesn’t apply, an investor may qualify using a less common method or special circumstances.

However, there are potential changes to this definition that are creating controversy around what an Accredited Investor should be.

What is Changing?

The SEC plans to alter the requirements for Accredited Investors in order to reduce the number of investors who qualify to participate in privately held, unregistered share offerings of at least $10 million. This is an effort to protect investors from the risk that unregistered investments pose. However, it could also eliminate opportunities for investors from underrepresented communities.

While the SEC is worried about creating a safe marketplace, opposers are calling for the opposite. They say changing the definition could exacerbate the wealth gap.

In April, the SEC is expected to meet on the topic and consider redefining the Accredited Investor definition. It also plans to ask for public comment on the topic. Some have already come forward to ask for an expansion of the Accredited Investor definition rather than a contraction. The goal, according to those in favor of an expansion, is to improve access to private markets for people who historically haven’t had access to increase diversity, equity, and inclusion.

Improving access to private markets is also an increasingly timely topic as more and more companies and even unicorns resist entering the public sector.

Why the Accredited Investor Definition is Important

If you are an investor on the cusp of the SEC’s requirements or a hopeful Accredited Investor, you have a lot of stake in the debate around the Accredited Investor definition. While the SEC may limit access to larger private offerings, they may also expand the requirements to include other credentials, such as particular degrees or leadership positions.

If you are a company looking to raise capital in private markets, the change to the Accredited Investor definition may limit the pool of investors able to participate in your offerings. Nevertheless, it will continue to be important to find accredited investors. This is because registering securities with the SEC is a timely and expensive process.

Whether the definition changes or not, though, it is just as important to take reasonable steps to ensure that the investors participating in your offerings are Accredited Investors.

At VerifyInvestor.com, we thoroughly vet investors before providing an accredited investor status certificate. Noncompliance consequences are severe and so every Accredited Investor is verified by a licensed attorney.

Private company, Accredited Investor, or otherwise, it will be important to stay informed of any changes the SEC decides to make to the definition. As always, we will keep you in the loop.