New changes to “Accredited Investor” status

In late August, the Securities and Exchange Commission announced some amendments to the accredited investor status, which you need to be aware of if you’re currently engaging in wealth building and want to eventually become an accredited investor. It’s also important to note that these changes won’t cause someone who previously qualified as an accredited investor to no longer qualify. The amendments are mainly designed to expand access to this status for investors who would not previously qualify. The following offers a closer look at the recent alterations to the accredited investor status and what they mean to you.

What Is an Accredited Investor?

When a business entity or individual is classified as an accredited investor, this means that the entity is effectively able to trade certain securities that aren’t registered directly with financial authorities. However, the entity in question must meet specific requirements to received this kind of accreditation. These requirements can extend to everything from professional experience to overall net worth and wealth.

Any person who is deemed to be an accredited investor is considered by the SEC to be financially knowledgeable, which also means that this individual won’t have as much of a need for the kind of protection that’s afforded by regulatory disclosure filings. The individuals who are classified as accredited investors are individuals with a high net worth. In most situations, individuals with a high net worth will have at least $1 million in liquid assets. Before making investments in securities, you should have a clearer understanding of the changes that have been made to the accredited investor status.

Amendments Made to Accredited Investor Status

Five separate amendments were made to the accredited investor status, all of which you should be aware of before investing. These amendments range from small to large and may not affect you.

Knowledgeable Employees for Private Funds

Without the addition of this amendment, the various categories of accredited investors include:

  • Individuals with a high net worth
  • Brokers
  • Trusts
  • Insurance companies
  • Banks

With this amendment, an additional category of accredited investor was created that can apply to individuals who may not have the kind of passive income or wealth that’s needed to be a high net worth individual. This category involves knowledgeable employees who are a part of a private fund. These individuals can be classified as accredited investors for the investments of the private fund in question.

A knowledgeable employee of the private fund can be a general partner, a trustee, a director, an advisory board member, or an executive officer. Anyone else who oversees investments from the fund could obtain this status. Keep in mind that you will need to be a part of the various investment activities pertaining to the fund for a period of 12 months or more.

Family Clients and Family Offices

This particular amendment adds another type of category to the accredited investor status, which provides a passive investor with additional opportunities to become an accredited investor. The new category refers to family clients and family offices. A family office must meet requirements like:

  • There are at least $5 million in total assets that are being managed under the family office
  • The family office wasn’t formed for the sole purpose of obtaining securities
  • Any investments under the family office are directed by someone who has experience and knowledge in business and financial matters, which means that this individual must be able to properly evaluate the risks and merits of the investment

As for a family client, this refers to someone who has an investment that’s directed by the family office. These individuals will also become accredited investors.

Expansion of Various Entities

Additional entities are being considered as accredited investors, which include:

  • Rural business investment companies
  • Limited liability companies that are able to satisfy all requirements of definition for accredited investor, which means that the employees of the limited liability company could classify as accredited investors
  • Any investment advisers who are registered with the Investment Advisers Act

It’s also important to note that any entity that wasn’t formed solely for the purpose of obtaining securities and owns more than $5 million in investments could become an accredited investor. This also applies to Native American tribes.

Professional Designations and Certifications

If you have been taking part in passive investing and are thinking about becoming an accredited investor, this particular amendment has added an extra category that makes it possible for individuals to obtain this status. If an individual possesses certain professional credentials, designations, or certifications, they may be qualified to be an accredited investor. These designations and certifications must demonstrate an extensive background and knowledge of investing and securities. If you currently hold a Series 7, Series 65, or Series 82 license from the Federal Industry Regulatory Authority, you will likely qualify to be an accredited investor.

One notable aspect of this particular amendment is that the SEC has some flexibility in regards to the credentials, certifications, and designations that they take into account when providing someone with accredited investor status. The credentials that are considered by the SEC can be altered at any time. In order for new credentials and designations to be used for accredited investor status, a self-regulatory organization, educational institution, or member of the public will need to submit an application for consideration to the SEC. The SEC will then deliberate to determine if the certification or credential should qualify.

Public notice must also be made by the SEC before the list of qualifying criteria is modified. If you opt to go this route when seeking accredited investor status, keep in mind that any qualified designation or credential of yours would need to be independently or publicly verified before the SEC would grant you accredited investor status.

Asset-Based and Income-Based Accredited Investors

Before these amendments were finalized, the SEC sought public opinion on whether the asset or income requirements for accredited investors should be altered in any way. The purpose of seeking opinions from the public was the determine if geography, inflation, or other factors should play a part in asset and income requirements. At the moment, the financial thresholds have been kept in place, which means that the requirements remain the same as they were before these amendments were passed.

These thresholds were initially set back in 1982 when only a small selection of individuals and entities were able to obtain accredited investor status. Since that time, an increasing percentage of the public have been able to receive this status. However, the SEC noted that the individuals who currently qualify are still able to protect themselves when trading securities. While passive investing is considered to be safer, timely information for securities is easier to access than it once was, which helps to keep accredited investors protected.

There were some small changes that have been made to these facets of classification. When joint income is being calculated for accredited investor status, the “spousal equivalent” term has been added to the definition of accredited investor. Spousal equivalents can also be considered when calculating net worth. With this amendment in place, spousal equivalents can pool their finances together with the main investor to qualify as an accredited investor.

Additional Info Pertaining to Accredited Investor Status

If you are looking for ways to increase your passive income as an accredited passive investor, there are still some additional pieces of information that you should be aware of. While the requirements that you must meet to become an accredited investor can be strict, they are relatively straightforward. Once you have received this status, you will be able to make non-registered investments and securities investments, which can include a focus on real estate and apartment deals.

To be classified as an accredited investor, you must bring in an annual income that’s higher than $200,000 or $300,000 with joint income. You will need to have earned this income for the past two years with the belief that you will earn the same income in the year that you apply for this status. You can also qualify for this status if your net worth is higher than $1 million. If you work as a director, general partner, or executive officer of the company that’s issuing unregistered securities, you can be considered an accredited investor. If you belong to a private business development company, the assets that are being managed by the organization must be higher than $5 million.

Whether you’re thinking about investing in real estate securities or mutual funds, becoming an accredited investor will give you the opportunity to obtain higher returns and to diversify your portfolio with assets that aren’t correlated with the market and the risk that comes with it. When engaging in wealth building, gaining accredited investor status can place you in the upper echelon of investors.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless