SEC’s Amended Definition of Accredited Investor Creates More Opportunity, More Risk

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.

With the latest SEC amendments, there are many new categories under which natural individuals may qualify as accredited investors based on factors such as professional certification and credentials provided by an academic institution. Similarly, self-regulatory institutions, industry bodies, and educational institutions are now able to apply for potential consideration under the expanded SEC rules. Knowledgeable employees of a fund will also now be considered as accredited investors with specific regard to investments in a private fund.  Additionally, state-registered investment advisors, rural business investment companies, and exempt reporting advisors comprise additional bodies who may qualify as accredited investors.  Limited liability companies that have $5 million in assets may also be accredited investors.  Further, terms such as family offices, family clients, and spousal equivalents have been added to the accredited investor definition. This allows for spousal equivalents and families with minimum assets of $5 million  to qualify as accredited investors within the guidelines listed in the Investment Advisers Act. There is also an additional category included in the accredited investor definition that now allows “knowledgeable employees,” who may include directors, trustees, and advisory board members among others.

The definition of an accredited investor had previously not changed this significantly since the early 1980s. Inclusion within the private equity markets required a certain net worth or income. This change, which became enforceable as of December 9, 2020, expands participation in these markets to individuals with diversity in credentials, both professionally and academically, which significantly reframes the definition of an accredited investor within the capital markets. This change opens new opportunities for investors to put their money into alternative investments and assets, such as hedge funds for example. The expansion and variety of what individuals may now invest in assists in potentially increasing returns.  Conversely, it increases downside risk and the number of investors who would have otherwise not been exposed to such riskier ventures.  It is not uncommon for new and relatively inexperienced investors to find out they initially “qualify” as an accredited investor but, in reality, they are being lured into something that is nonetheless unsuitable for their risk tolerance and investment objectives.

If you have suffered a significant investment loss as a result of being sold a private or alternative investment that may now be illiquid, and you believe you were not appropriately informed or appraised as an accredited investor from the outset, call our experienced, New York securities attorneys for a free consultation.

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