Expanding the Definition of “Accredited Investor”

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Expanding the Definition of “Accredited Investor”

By Shelley Goldberg, Senior Correspondent

Being both smart and rich is every investor’s dream.

Some people assume that one needs to be smart to become wealthy. Others argue the wealthy have more opportunities to become smart – perhaps it’s because they’re able to purchase a better or higher education for themselves or their children, or that money gives them access to educated circles where knowledge and insight rub off on them.

Whatever your opinion, the connection between wealth and intelligence was recently addressed by the U.S. House of Representatives as it pertains to investing – or, more specifically, how the U.S. government defines what it means to be an accredited investor.

You see, qualifying as an accredited investor is significant because accredited investors may, under Commission rules, participate in a whole host of investment opportunities that aren’t registered with the U.S. Securities and Exchange Commission (SEC) and generally aren’t available to non-accredited investors.

This includes investing in private companies and offerings by hedge funds, private equity funds, and venture capital funds.

What Being an Accredited Investor Means

Until recently, all it took to be qualified as an accredited investor was having or making the big bucks.

In order to be considered an accredited investor, as defined by the SEC’s Rule 501(a) of Regulation D, an investor had to qualify under at least one of the following:

• As an individual, have an annual income and net worth of $200,000.
• With a spouse, have an annual income and net worth of $300,000 in each of the two most recent years, with an expectation of reaching the same income level in the current year.
• Either individually or jointly with a spouse, have a net worth of $1 million, excluding the positive equity in such person’s primary residence.
• Be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.

Welcoming the Educated

But as of February 1, all of this has changed.

The Financial Services Committee and the U.S. House of Representatives passed H.R. 2187, known as the Fair Investment Opportunities for Professional Experts Act.

The bill passed by a whopping 347 to 8 (with 78 members not voting).

This is significant for one major reason: It would amend the Securities Act of 1933, the first major federal legislation to regulate the offer and sale of securities, which was enacted during the aftermath of the ’29 stock market crash.

It was no easy task, as an official report released by the SEC staff in December 2015 included 11 possible revisions to Rule 501(a).

H.R. 2187 is so important because it incorporates the addition of a knowledge and education-based category of accredited investors by changing and expanding the definition.

So now you don’t have to be wealthy. If you’re smart or sufficiently educated, you’re in!

Defining “Smart”

While being educated doesn’t necessarily equate to being smart, the House bill expands the list of accredited investors to include the following individuals, regardless of whether they meet the income or net worth requirements:

• (i) persons who are licensed in the securities industry (such as a registered broker or investment adviser) with the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”), or the securities division of a state or an equivalent state division;

and

• (ii) persons whom the SEC determines by regulation to have demonstrable education or job experience to qualify such persons as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA or an equivalent self-regulatory authority.

In plain English, the bill will allow individuals to qualify as accredited investors based on measures of sophistication such as a minimum amount of investments, certain professional credentials, experience investing in exempt offerings, knowledgeable employees of private funds, or by passing an accredited investor examination to qualify as an accredited investor.

Who Benefits?

If anyone is happy about this bipartisan passage, it’s the startups and small businesses looking to raise funds via equity crowdfunding.

Proponents are now expecting to see a flood of online platforms register with FINRA, as well as the emergence of secondary markets to handle sales of previously issued, crowdfunded equities.

The State Science & Technology Institute (SSTI) expects as many as 225 million new investors to flood into the private equity market.

Another group that’s applauding the passage is the Hedge Fund Association (HFA), as the bill will likely attract more money to its members’ funds.

The revision also adds language requiring the SEC to adjust the dollar thresholds for inflation every five years. So you may have to be even wealthier or make more money in years to come. But as long as you’re educated, it doesn’t matter!

While many industry professionals believe the definition of an accredited investor is still too narrow and continues to exclude a large number of potential investors, it’s still a move in the right direction.

Good investing,

Shelley Goldberg

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By Shelley Goldberg