In August 2020, the Securities and Exchange Commission (SEC) adopted amendments to expand the definition of an “accredited investor.” Adding these new expansive conditions as to who may qualify as an accredited investor will allow more investors to participate in private investment offerings, creating both more opportunity and more risk. The goal of the SEC with this expansion was to both simplify and amplify investor opportunities, investor protections, and capital formation.
Traditionally, an accredited investor can be a business or individual that is qualified to trade unregistered, privately traded securities (i.e., not traded on a public stock exchange) by fulfilling specified minimum requirements such as net worth, income, assets, and trading experience or authority. Typically, issuers of unregistered securities are limited to sell only to accredited investors because they are considered more able to handle the associated risks. While every investment has risk, non-public investments carry additional risk of having low liquidity, meaning it can be incredibly difficult to find a buyer if the investment goes south.
Accredited investors are important players in the securities industry because they provide liquidity and funds to new and unregistered investments in need of capital. Historically, an accredited investor can be a bank, a private business, an organization, a director, or any individual who typically has a separate or combined net worth of $1 million dollars.