The Securities and Exchange Commission announced on August 26, 2020, an impactful change to the definition of accredited investor that will disrupt who will be qualified to invest in hedge funds, private equity, and startups.
Historically only a person who qualified as an accredited investor under federal securities laws may partake in certain securities offerings. Previously the definition of an accredited investor is anyone who earned an annual income of $200,000 (or $300,00 together with a spouse) in each of the prior 2 years, and reasonably expects the same income for the current year, or who has a net worth over $1 million, either individually or together with a spouse, excluding the value of the person’s primary residence.
Other characteristics previously to define an accredited investor also included any trust with total assets exceeding $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person (the person, company or private fund offering the securities believes that this person has knowledge and experience to be able to evaluate a prospective investment), or any entity in which all of the equity owners are accredited investors.
Last year the SEC estimates $2.7 trillion was raised on private markets compared with $1.2 trillion on public markets, allowing new accredited investors more opportunities to invest as well more opportunities to diversify their portfolio.
The SEC expands its definition of accredited investors by allowing a person to qualify as an accredited investor based on professional certifications, designations, or credentials. Also, “knowledgeable employees” in a private fund may qualify as accredited investors.
After publication in the Federal Register, the new rule is enacted 60 days.
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