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Posted on November 23, 2020 @ 02:11:00 PM by Paul Meagher
On August 18, 2020 the US Securities & Exchange Commission issued a press release titled "SEC Modernizes the Accredited Investor Definition". The press release was accompanied by a 164 page final ruling document (PDF) that goes into much greater detail on the history behind and motivations for the definitional amendments that will soon be official.
The accredited investor definition is important because "accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, including certain investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds. The
final rules are tailored to permit investors with reliable alternative indicators of financial sophistication to participate in such investment opportunities (p. 4)".
The amended definition now looks at more than an individuals net worth to determine if a person should be considered an accredited investor or not:
Prior to the adoption of these final rules, in the case of individuals, the accredited investor definition has used wealth—in the form of a certain level of income or net worth—as a proxy for financial sophistication.
However, as stated in the Proposing Release, 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. These include the ability to
assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss. Accordingly, the final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity. ~ pp. 5-6.
In order to see what types of knowledge or expertise the commission believes provides the requisite level of sophistication, you should consult the 164 page final ruling document.
The new accredited investor definition also allows matrimonial partners to pool their funds to meet the net worth tests for being an accredited investor.
Also, an employee of an issuer who has excellent knowledge of the risks involved may also participate as an accredited investor of that issuer.
The definitional changes allows more individual investors to qualify as accredited investors. It also allows more institutional investors to quality as accredited investors. I won't go into all the changes here as the purpose of this blog is to draw attention to some of the changes so you can do your own deep dive into all the changes and their potential significance.
Harvard Law School Forum has also posted a summary of the changes.
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