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SEC Expands Definition of Accredited Investor

The Securities and Exchange Commission has adopted amendments expanding the definition of accredited investor, one of the principal tests for determining who is eligible to participate in private capital markets.


The Securities and Exchange Commission has expanded the definition of accredited investor, one of the principal tests for determining who is eligible to participate in private capital markets.

Historically, individual investors who did not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in private markets. Previously, the sole criteria were an individual income of $200,000, a joint income of $300,000, or a net worth that exceeds $1 million – not including a primary residence.

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” said SEC chairman Jay Clayton. “I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations, that may qualify to participate in certain private offerings.”

In addition to the existing tests for income or net worth, the latest amendments allow investors to qualify as accredited based on defined measures of professional knowledge, experience or certifications. The amendments also expand the list of entities that may qualify, including by allowing any entity that meets an investments test to qualify.

Industry trade groups that represent the alternative investment space applauded the updated definition, while pressing for further expansion in the future.

“ADISA applauds the SEC’s expansion of the accredited investor definition and encourages the Commission to examine the potential for an even greater expansion of the definition so that appropriate individual investors can enjoy access to alternative investments and the benefits they can provide to a well-balanced portfolio,” said John Harrison, executive director of the Alternative and Direct Investment Securities Association.

Anya Coverman, senior vice president of government affairs and general counsel at the Institute for Portfolio Alternatives, called the move an “important first step,” while adding, “While the Commission could have gone farther in updating a definition that is a cornerstone of Regulation D, the IPA supports the Commission’s invitation for further public feedback and comment. We also encourage the Commission to make suggested changes related to retirement plans in rulemaking this year.”

Highlights to the amended accredited investor definition, include:

  • Holders in good standing of the FINRA Series 7, Series 65, and Series 82 licenses now qualify, and the SEC may reevaluate or add certifications, designations, or credentials in the future.
  • Natural persons who are “knowledgeable employees” of a private investment fund
  • Limited liability companies with $5 million in assets may be accredited investors, as well as SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs)
  • An entity, including Native American tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered
  • Family offices with at least $5 million in assets under management and their family clients
  • Spousal equivalent was added to the definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
  • The amendments expand the definition of qualified institutional buyer to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition.

The amendments and order become effective 60 days after publication in the Federal Register.

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