Are You an Accredited Investor Under the SEC’s Updated Definition?

What is an accredited investor?

“Accredited investors” is a term defined in Rule 501(a)—and also found in Rules 215 and 144A—of the Securities Act of 1933. This term describes the individuals and entities that are allowed to participate in investment opportunities offered under exemptions that do not have the disclosure, procedural, and investor protection requirements provided by registration under the Securities Act of 1933.

The SEC has historically maintained that the accredited investor definition is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act’s registration process unnecessary.”

In short, you need to qualify as an accredited investor in order to invest in most venture capital investing opportunities (aside from Regulation Crowdfunding, which is open to accredited and non-accredited investors).

Who qualifies as an accredited investor?

The former definition of an accredited investor applicable to a natural person was broadly based on net worth and income qualifications. However, the newly amended definition is based on the SEC’s determination that wealth should not be the sole means of establishing financial sophistication. The updated definition of an accredited investor expands the existing qualifications with amendments to revise Rules 501(a), 215, and 144A of the Securities Act.

In general, the SEC now allows individuals to qualify as an accredited investor based on certain professional certifications, designations, or credentials, as well as if they are “knowledgeable employees” of a private fund (with respect to an offering for that fund). Additionally, the existing income and net worth qualifications that apply jointly to an individual and his or her spouse are now expanded to include a “spousal equivalent,” which is defined as a cohabitant with a relationship generally equivalent to that of a spouse.

Also, certain non-natural person entities (such as limited liability companies, Indian tribes and governmental bodies, and “family offices”) may now also qualify as accredited investors if they meet certain minimum asset or investment ownership qualifications described in the amendments.

Summary of New Criteria

In summary, the expansion includes the following as new qualifications for being an accredited investor:

• Persons holding certain professional certifications, designations, or credentials

• “Knowledgeable employees” of a private fund

• Limited liability companies and certain other entities with $5 million minimum assets

• Certain qualified entities, such as Indian tribes and governmental bodies, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million

• “Family offices” with minimum $5 million in assets under management that meet certain requirements

• “Spousal equivalents” allowed to pool finances for the purpose of qualifying as accredited investors under the rules for joint finances

In order to qualify as accredited, these entities cannot have been formed for the purpose of acquiring their target investment.