The Debate over the SEC’s Proposed Increase of the Wealth Threshold Requirements of the Accredited Investor Definition

It’s no surprise that investors and regulators don’t always see eye to eye. One major point of contention that continues to spark debate is the Securities and Exchange Commission’s (SEC) definition of “accredited investor.” This issue heated up again recently due to the SEC’s April 2023 proposed increase in the wealth threshold requirements for the “accredited investor” definition.

Not so long ago the SEC broadened the definition of accredited investor to include, among other categories, “knowledgeable employees” and “family offices.” By expanding the definition of accredited investor in this way, the SEC widened the investment opportunities for individuals and entities looking to invest in private equity deals.

During the debates over the SEC’s 2020 changes to expand the definition of “accredited investor” to include new categories of individuals, the fact that wealth alone is not the only or even the most valid, indicator of a person’s investment sophistication, was stressed by regulators and investors alike.   

The 2020 amendments to the SEC’s definition of “accredited investor” enabled potential investors to qualify as an accredited investor based not only on income or net worth but upon defined measurements of professional knowledge, experience, or certifications — expanding the number of investors who can participate in private equity while at the same time carrying out the SEC’s mission to protect investors. 

This time, however, the SEC’s proposed changes will move the needle in the opposite direction. 

According to reports, the SEC will be changing the definition of “accredited investor” to increase the wealth threshold requirements that must be met for individuals or entities to qualify as an accredited investor. 

As we will discuss in more detail below, critics say that this will severely limit who may receive an accredited investor status certificate, narrowing the field of potential investors and making it harder for companies trying to raise capital to figure out how to find and verify accredited investors. 

The Current Definition of “Accredited Investor.”

The Securities Act of 1933 (“Securities Act” or “the Act”) requires that every public offering of a security be registered with the SEC. Registering securities with the SEC protects investors, but it is a burdensome, time-consuming, and expensive process for businesses. As a result, over the years, the SEC developed some exceptions to the rule in order to ease the regulatory burden that registration places on small businesses.

Most notably, private placements under Regulation D (“Reg. D”) are not required to comply with the SEC’s comprehensive public disclosure requirements that apply to registered offerings. For investors, this means that they can participate in private offerings — SO LONG AS — the investor is either an “accredited investor” or the number of non-accredited investors is limited to 35 (see, Reg. D 506(c).). 

The SEC’s definition of “accredited investor” contains both net worth and income requirements to protect investors from fraud. It also includes other indices of financial sophistication. For the most part, the SEC’s definition of “accredited investor” hasn’t changed significantly since 1982. 

The current wealth threshold for its definition of “accredited investor,” found in Rule 501 of Reg. D, requires that an individual be able to show that in the most recent two-year period he or she individually had an income in excess of $200,000 or a net worth (excluding a primary residence) of over $1 million. Alternatively, an investor can qualify if he or she had a joint income (in the past 2 years) with his/her spouse (or spousal equivalent) in excess of $300,000, and he/she has a reasonable expectation of reaching that same income level in the upcoming year. 

Regarding the indices of sophistication, in 2020, the SEC broadened the definition of accredited investor to include: 

• knowledgeable employees,

• registered investment advisors, exempt reporting advisers, and rural business investment companies, 

• a catch-all provision for entities that own more than $50 million, and

• family offices and family clients.

One of the major advantages of being an “accredited investor” is that it opens up investing opportunities that are not available to non-accredited investors. For example, while non-accredited investors can invest in mutual funds unless an offering meets an exemption, non-accredited investors either cannot participate at all, or only 35 non-accredited investors can participate, in a private equity offering.

By changing the definition of “accredited investor” to include more individuals with sophisticated investment experience, the SEC broadened investing to reach more investors. At the same time, however, the SEC required that issuers offering Reg. D securities verify accredited investor status for each one of their investors.  

Increasing the Accredited Investor Wealth Threshold, Decreasing the Number of Accredited Investors.

Having expanded the indices of sophistication in 2020, thus allowing more people to participate in investing, the SEC’s proposed 2023 changes to the definition of accredited investor will raise the required wealth threshold. 

This latest proposed expansion of the definition of “accredited investor” is causing quite a stir in the investment community.

Under Chairman Gary Gensler, the SEC intends to amend “the accredited investor definition by increasing the annual income and net worth thresholds.”

What dollar amount the wealth threshold will increase to has not been announced yet by the SEC. However, according to some reports, it is possible that the SEC might link the wealth metric to inflation. If that does happen, it is believed that the threshold requirement could triple — drastically diminishing the pool of accredited investors. 

Opponents of the SEC’s proposed reforms to Regulation D (“Reg. D”), including increasing the wealth threshold for “accredited investors,” argue that these reforms will increase costs, complexity, and liability exposure of companies attempting to raise capital under the Reg. D exemptions. 

Angel investors posit that the proposed changes will severely reduce the number of wealthy individuals who can participate in investment opportunities. This, they say, will have a national effect that would be devastating to start-ups that rely on angel investors to raise capital, because the increased wealth thresholds will reduce the pool of angel investors able to meet the new thresholds. 

Other arguments are that the SEC’s changes will unfairly limit access to those who do not have excessive wealth, thereby increasing a lack of diversity in investing. Many object to the SEC’s proposals as being overly paternalistic and interfering with an individual’s right to decide for himself/herself whether to invest or not. 

Opponents of the change point out that Rule 506(b) and the less frequently used 506(c), play a significant role in raising capital for small businesses. According to reports, between July 1, 2021 and June 30, 2022, Rule 506(b) offerings raised more money than all registered offerings ($2.3 trillion), while even the less used Rule 506(c) offerings raised more money than IPOs.  

And yet, despite this significant impact, the SEC’s current wealth threshold, as expressed in its current definition of “accredited investor,” already prevents over 90% of American households from participating in these offerings. 

Increasing that threshold even further, opponents argue, will serve only to increase that gap. In addition, opponents point out that being wealthy is not the same as being “financially sophisticated.” Lottery winners have money, but that does not mean that they are “financially sophisticated” or are experienced investors. Nevertheless, the SEC’s new proposed changes would allow financially unsophisticated investors to participate in riskier private offerings, while eliminating experienced but less wealthy investors from doing so. Given all this, opponents say that the SEC’s definition of “accredited investor” is flawed because it places more emphasis on how much money a person has rather than how much education or investment experience he or she has. 

In defense of the change, U.S. Securities and Exchange Commission (SEC) Commissioner Caroline Crenshaw indicated in a recent talk that Reg. D was intended as a limited exception but over time, it has gotten out of hand. 

From the SEC’s point of view, a number of reforms are necessary to protect investors. 

According to the SEC Commissioner, over the years, the use of Reg. D has caused a “bloating effect” on private issuers — allowing private companies to raise billions of dollars to fund their growth without the regulatory oversight necessary to protect investors. The concern is that the lack of information about private businesses and the minimal regulatory oversight makes private equity investments riskier for investors — putting even sophisticated investors at a disadvantage. Increasing the wealth threshold, according to the SEC, will protect the vast number of investors from being in a situation where they receive little to no disclosures. 

According to the SEC Commissioner, financial sophistication does not adequately protect investors in the same way that disclosures and regulatory oversight do.  

Changes Are Coming. 

Whichever side of the debate you land on, one thing is for sure: you can expect to see some changes in the near future to the SEC’s definition of “accredited investor.” 

While the emphasis for accredited investor criteria has always included an income test and a certain level of wealth, both sides of the debate have indicated that it’s not only about how much money a person has — there should be some more definitive way of assessing an individual’s investment experience, knowledge, and sophistication. 

In the meantime, accredited investors and issuers can rely on VerifyInvestor.com for accredited investor status verification. At VerifyInvestor.com, we offer a world-class accredited investor verification service. Our services are fast, efficient, cost-effective, confidential, and reliable. We help companies fully and easily comply with their legal obligations to verify investors as accredited investors.

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Estate Planning and Veterans: Securing Your Legacy

Whether you are a veteran, active military, or a civilian, estate planning is critical for securing your legacy. It allows you to direct how your property should be distributed at death and to prepare for unexpected events like becoming incapacitated. 

It does not matter what level of income you have, your investor criteria, what assets you have, or how you provide proof of assets, all adults over the age of 18 should have an estate plan. An “estate” for estate planning purposes is made up of an individual’s tangible and intangible property. Any adult who owns any type of property — a car, a home, a bank account, cryptocurrency, a website, etc. — has an “estate” for estate planning purposes.  

But estate planning is much more than just passing on one’s property. 

It focuses on an individual’s specific financial and personal situation to provide for your family’s future and minimize taxes as much as possible. In addition, estate planning helps you to anticipate and prepare for what might happen if you become incapacitated and unable to make decisions for yourself. 

Estate planning attorneys use a variety of legal tools and documents to help people plan for the future so that individuals do not have to rely on statutory law or the court system to make their most important decisions for them. 

Overall, estate planning is one of the best ways to plan and prepare for the future.

Why Estate Planning is Essential for Veterans

While everyone can benefit from having an estate plan, it can be even more essential for active military and veterans. 

Why?

Because those who serve in the military are in a unique situation. 

Members of the military move frequently. They also put their lives on the line during wars. Even during peacetime, many military jobs subject personnel to highly dangerous conditions. These factors make it more likely that veterans and active military may become injured or suffer serious permanent disabilities due to their work or work environment. It is this inherent precariousness in military service that makes it imperative for members of the military to have an estate plan in place.

In addition, veterans have access to a number of government benefits. These benefits can make estate planning for veterans more complicated as government benefits are frequently subject to unusual tax rules.

Veterans need to understand how their benefits impact their estate and estate taxes, so they can plan and provide for their families and their future.

For example, veterans may be eligible for benefits such as:

• life insurance coverage for the veterans and their families

• survivor benefits if the veteran dies due to service-related illness or injury.

• pension plans, or

• disability compensation.

Various government benefits can significantly affect your future and the financial futures of your loved ones. Planning how to pass on these benefits is critical but complicated due to eligibility requirements, so be certain to consult with an experienced trusts and estate or probate attorney where you live to assist you. 

Another important consideration is what happens if you die or become incapacitated and you don’t have an estate plan in place. 

If you die without having made an estate plan (in other words, you die “intestate”), then your estate must go through probate. Probate is the court-supervised process of distributing a person’s property. It’s an expensive and time-consuming process. 

When a person dies intestate, the court will use the intestacy laws to decide who gets what and how much of your property. 

Even worse, if you don’t have the right documents in place and you become incapacitated, the court and the statutory law of your state will decide who should take over your finances and make decisions for you. This could be someone you know, or it could be a complete stranger. 

Becoming a “ward of the state” and having the court appoint a guardian for your person and/or property is something you want to avoid at all costs. It is a well-known secret that this area of probate, known as “guardianship,” is fraught with serious fraud and abuse. 

All in all, estate planning is essential for everyone, but especially for veterans and active military personnel.

What Goes into Securing Your Legacy? 

To address the myriad life-impacting issues that could arise in a person’s future, estate planning relies on a variety of legal documents and estate planning strategies. 

The most commonly known — and often the most misunderstood — legal documents are the Last Will and Testament (“Will”) and Revocable Living Trust (“Trust”).

Wills and Trusts are both legal documents that assist in directing and carrying out an individual’s estate plan. 

Although separate and stand-alone documents, Wills and Trusts work together; much like peanut butter and jelly. 

Hold on, we can explain.

Think of it this way: You can have a sandwich with just peanut butter. Or you can have one with just jelly. Either one will be fine. But together, peanut butter and jelly make the perfect — and complete — sandwich. 

Wills and Trusts are a bit like that.

You can have just a Will for your entire estate plan, or you can have just a Trust. But when your estate plan has both, all bases are covered, and you have a more complete estate plan. 

Why is it best to have both a Will and a Trust?

Because a Will can do some things that a Trust cannot, and visa versa.

So, what are the differences between a Will and a Trust?

Basically, a Will is a formal legal document that directs the disposition of your property (both tangible and intangible) after your death. To be valid, a Will must comply with all the legal formalities of your state. The most basic of these are that:

• the person making the Will (the “testator”) must have legal capacity,

• the Will must be in writing,

• it must be signed by the testator, and 

• the testator’s signature must be witnessed.

The specific Will formalities vary by state, so be sure to consult your state’s laws. However, these are the most frequently seen formal requirements for Wills. 

While a Will can dispose of many different types of property, it cannot dispose of all property. For example, a Will can only pass on property that is titled in your name. A Will cannot pass on:

• joint property

• life insurance policies or other property with beneficiary designations

• payable upon death accounts

• retirement plan accounts, or

• employee death benefits. 

Additionally, passing on certain digital assets through your Will — like email accounts or cryptocurrency — can be problematic due to security and transferability issues. 

Also, a Will does not come into effect until you die.

On the other hand, in your Will, you can appoint the person whom you want to administer your estate at your death. You can also decide who will take care of your children in the event of your death or incapacitation. Your Will can be used to decide when your children (or other beneficiaries) are allowed to receive their inheritance. This can be especially helpful if you have small children and you don’t want them to receive their entire inheritance until they reach the age of maturity or another age where you deem they will be mature enough to handle it. 

Unlike relying on the intestacy laws, when you have a validly executed Will, you are the one who makes all the important decisions — not a judge or impersonal law. 

In contrast, a Trust is also a legal document, but the trust document creates a legal entity (the “trust”). This legal entity is created by agreement between the trust maker (“trustor,” “grantor,” or “settlor”), and the trustee (the person who will manage the trust) for the benefit of certain individuals (the “beneficiaries” of the trust). 

In a trust, the trustee holds title to the trust property and manages it for the benefit of the beneficiaries.

A trust, because it is a legal entity, can hold and own property. A Will cannot do this. All a Will can do is pass on property.

Most assets can be titled in a trust, but because the laws vary by state, there may be important exceptions to this, so always be certain to consult with experienced estate planning counsel where you live.

Trusts can be revocable or irrevocable. As their names suggest, a revocable trust can be changed during the lifetime of the settlor whereas, (with few exceptions), an irrevocable trust cannot be.

Most estate plans use “revocable living trusts.” Unlike a Will, the Trust comes into being and operates during the lifetime of the settlor or grantor. 

If the living trust is revocable, it can be changed or revoked at any time during the settlor’s lifetime. 

In most cases, the trustee of the Trust is also the grantor or settlor. He (or she) then manages the Trust during his/her lifetime, and at the time of death, a successor trustee takes over. The successor trustee is then responsible for managing and ultimately distributing the property to the beneficiaries following the Trust’s terms.

Because they are flexible estate planning tools, Trusts are greatly favored by many estate planning attorneys as part of a comprehensive estate plan. But they are not the only estate planning tool. As mentioned, most estate plans make use of both a Will and a Trust.

What is best for you will depend entirely on your specific situation.

Some Important Documents Beyond a Will and Trust

As noted previously, an estate plan anticipates more than just property distribution at the time of your death. One of the significant issues it takes into account is what might happen if you become incapacitated and unable to make decisions for yourself.

Preparing for possible incapacitation is critical to do. Without the necessary documents in place, if you should become incapacitated, for example, due to a stroke or accident, no one can act on your behalf. This means that even your spouse cannot sign documents on your behalf.

Plus, as we have seen time and time again, family disputes over medical interventions for those who do not have health care directives or powers of attorney in place can quickly turn into emotionally charged, expensive, and prolonged legal battles. The sad cases of Terri Schiavo and Karen Ann Quinlan are just two examples of this. 

To address the situation of a possible incapacitation, there are two common estate planning documents beyond a Will and a Trust, that every veteran should have in place. These are a power of attorney and a health care directive (also called a “health care surrogate designation” “medical power of attorney,” or “advance health care directive”).

A power of attorney is a legal document in which you appoint a person of your choice to act as your agent. You decide the extent of the authority your agent can have, but generally, a power of attorney gives someone the authority to pay your bills, purchase property, and make other legal and financial decisions for you.

A health care directive appoints a person you trust to make medical decisions for you if you should become incapacitated. This legal document gives your chosen individual the power to decide what life-prolonging medical interventions you will or will not receive. 

If you are a veteran and don’t have an estate plan in place, don’t wait any longer. Get one. Estate planning is essential for everyone, and, most importantly, for veterans. Securing your legacy isn’t hard to do. It may not be exciting, but it is something that every veteran should do. 

For more information on this and other important topics, go to VerifyInvestor.com.

VA Home Loans: Your Path to Homeownership

Owning your own home is not only the American dream, it’s a great investment. But with soaring housing costs and ever-increasing interest rates, buying a home can be quite challenging for most people.

For veterans, servicemen, and their survivors, the path to homeownership is made a bit easier due to Veteran Administration (“VA”) home loans. 

VA home loans offer better terms than most traditional mortgage loans and certain benefits — like no down payment — that are unavailable to civilians.  

There are specific eligibility requirements that must be met, of course, but for most veterans and their families, VA home loans are the entry point and path to homeownership.

About VA Home Loans

VA home loans are government-backed home loans. What this means is that, for veterans, servicemen, and their eligible surviving spouses, the U.S. Department of Veterans Affairs guarantees a private money mortgage loan (up to a certain amount of the total loan). For private lenders making home loans to veterans, this guarantee ensures that they will get some money back even if the homeowner defaults on the loan.

This home loan benefit for veterans and servicemen grew out of the Servicemen's Readjustment Act of 1944 (also known as the “GI Bill” or “GI Bill of Rights”).  The purpose of the GI Bill of Rights was to assist veterans to readjust to civilian life after returning from World War II. 

VA home loans are available to veterans and active military who meet certain qualifications. 

But before we dive into the benefits and different types of VA home loans, it is important to know what VA home loans are not intended to be used for.

To foster the purpose of the GI Bill, VA home loans are designed to help veterans purchase a single-family home or condominium that they will be living in. 

VA home loans are not intended to be used solely for investment purposes. Thus, VA home loans cannot be used primarily to purchase investment properties, vacation homes, rental properties, or other income-producing properties. 

As with other exemptions provided by law, like those created by the JOBS Act, and Rule 506(c), it is critical to stay within the law’s specifications. 

Even with the no-investment home limitation, however, VA home loans provide several benefits for veterans seeking to purchase a home. 

Types of VA Home Loans 

There are several different types of VA home loans.

These include (may not be limited to):

• purchase money loans

• cash-out refinance loans

• interest rate reduction refinance loans

• Native American direct loans

• adaptive housing loans for disabled veterans

Each different type of loan program offers a variety of loan benefits for veterans that can help you save money and buy, renovate, adapt, or refinance your home. 

The Benefits of a VA Home Loan 

Perhaps the most attractive aspect of VA home loans is that, unlike conventional home loans, they do not require a down payment.

This benefit is enormous. For example, if you live in California, the average amount required for a down payment on a house is between 15% to 20% of the purchase price. Given that most house prices in California can easily reach $1,500,000 or more, not having to put down a down payment can save you anywhere from $225,000 to $300,000 on average. That’s an unbeatable benefit.

Even with a more traditional and far lower 5% down payment rate often used throughout the rest of the country, a house that costs $300,000 will require a down payment of $15,000.00. So having a $0 percent down payment is a fantastic benefit.

One cautionary point here: while the VA does not require a downpayment on a VA home loan, some private lenders may require a down payment. 

Another major benefit of VA home loans is that borrowers are not required to carry mortgage insurance. This can save veterans thousands of dollars.

Among some of the other benefits of a VA home loan are:

• competitive interest rates

• foreclosure assistance

• no prepayment penalties for paying off the mortgage early, and 

• reduced closing costs.

Buying (or refinancing) a home with a VA-backed home loan offers veterans and active military alike a path to homeownership. But, as with most things, there is more to know. 

Chief among these important factors to understand is that you must qualify for a VA home loan. 

So let’s take a look next at eligibility requirements.

VA Home Loan Qualifications

As noted above, there are different types of VA home loans, and each loan may have different requirements. In addition, to qualify for a home loan, you must provide your lender with a Certificate of Eligibility.  

The first step, then, is to determine whether you are eligible for a VA home loan.

To be eligible to apply for a VA home loan, a serviceman, veteran, or spouse must be able to establish that he or she: 

• has at least 90 days of active-duty service, 

• served for at least six years of service in the Reserves or National Guard, 

• served at least 181 days of active-duty service during peacetime,

• has 90 days of cumulative service under Title 10, or 90 days of service (with at least 30 of those being consecutive service) under Title 32, 

• is the spouse of a military service member who died in the line of duty, or due to a service-related disability.

Bear in mind that not only do you need to be eligible for the VA home loan, but, as noted above, the loan itself must be for an eligible purpose. Thus, to fully qualify, you must intend to occupy the premises as your home and the loan amount cannot exceed the appraisal value of the property.

Tips for Veterans Looking to Purchase a Home

Purchasing a home is a complicated process for anyone. However, when the government is involved, things can get even trickier due to government rules and regulations. 

So here are a few tips for veterans looking to purchase a home with the help of a VA home loan.

Tip Number 1: Get the Right Lender and the Right Real Estate Agent.

Not all real estate agents are familiar with the demands of military life or the rules surrounding VA loans. Thus, you must find a real estate agent who has experience working with VA borrowers. 

Throughout the process, there will be specific paperwork and certain requirements that must be met, and an agent experienced in this area can do much to help you avoid unnecessary delays or homes that don’t meet the minimum standards.

In the same way that you need the right real estate agent, you also will need the right lender. VA-backed home loans are made by private lenders, like banks, mortgage companies or savings and loan associations. 

Tip Number 2: Get a Copy of Your Credit Report and Review it.

The first thing a lender will do before deciding whether or not to make a loan is a credit check of the potential borrower. For veterans looking for VA home loans, it is essential to be aware that your credit history will be an important focus of the home-buying process.

Your credit doesn’t have to be perfect to get a loan, but having a high credit score will do much to help you get approved for the home loan that you want. 

Before you apply for a loan, one of the things you will want to do is to get a free copy of your credit report and review it for any errors. 

Tip Number 3: Don’t Forget About Closing Costs.

Just because you won’t need to come up with a down payment if you get a VA home loan, that does not mean that there are no costs associated with buying a home. Of course, there are.

There will be additional costs such as closing costs, property taxes, and insurance to be paid. So make sure you have enough money to cover those costs before you start the process.

And finally, don’t be lulled into forgetting that this is a loan, not a gift. 

That means you have to repay the loan. Every month. You may “qualify” for more than you can manage to pay back every month, so before you take a loan, be certain your income is sufficient to make the monthly mortgage payments. 

Tip Number 4: Make Sure You Can Meet the Occupancy Requirements.

While having access to VA-backed home loans may be an advantage on the path to home purchase, an area of home buying that can prove difficult for servicemen is the occupancy requirement of VA home loans.

These loans are intended to help veterans get into a single-family residence. As such, VA home loans require that the purchaser be living in the home as his or her primary residence within 60 days of closing. 

This can prove difficult for military personnel at times but do the right thing. Make sure your intentions are aligned with the purpose of the loan and that you will be living in the house as your primary residence after purchase.

Tip Number 5: Start Saving. 

If you are a veteran looking to get into the housing market, you should not wait to start saving for your dream house. Even with the help of a VA-backed home loan, purchasing a house can be costly. 

The loan is just one piece of the home-buying puzzle. There are other fixed costs you will need to be prepared for like hazard insurance, closing costs, pre-paid taxes, and title insurance. 

The sooner you start saving, the better.

Tip Number 6: Do Your Homework.

Finally, do your own due diligence. 

Look into VA home loan requirements and limitations. Talk to experienced professionals who can help you analyze your options and take the time to educate yourself about mortgages, interest rates, and housing costs.

Having a VA home loan can get you started down the path to homeownership, but it is up to you to make sure you are fully prepared to become a homeowner.

Making well-informed decisions is critical when you are buying your first home. Your home is an investment in your future, so do your best to make the best possible decisions. For more information on this and other important topics, go to VerifyInvestor.com.