The 6 New Ways To Become An Accredited Investor

By Adam Tarlowski:

A press release from the SEC yesterday, August 26th, revealed newly adopted amendments to the “accredited investor” definition.

*If you already read The Wolf Den #90, we recommend you skip ahead to the bottom section to learn the 6 new ways to become an accredited investor.*

Previously, to invest in private markets, an investor had to have a yearly income of $200,000 for the past couple of years or a net worth over 1 million dollars excluding their residence in order to participate. Our good friend Sahil Bloom, who was just recently on the podcast, pointed out that a newly minted Robinhood trader can participate in a risky margin trade mortgage REIT, but is denied a chance to invest in their neighbor’s startup business. The laws were due for a change.

The new definition of an accredited investor has expanded to someone with, “professional knowledge, experience, or certifications.” In total, 6 additional ways to meet the requirement were outlined in addition to the current standing laws. The SEC’s reason for this move was to “simplify, harmonize, and improve the exempt offering framework, thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.” This amendment may disadvantage the elite 1%, but it benefits millions of investors, plus it brings new money into markets.

The 6 New Ways to Become an Accredited Investor:

Have good standing of Series 7, Series 65, and Series 82 licenses or in conjunction propose alternative professional certifications, designations, or credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status.

Knowledgeable employees of a private fund

LLC’s with 5 million in assets not formed for the purpose of investing

Any entity with $5 million in investments

Family offices with $5 million in assets under management and their family clients

And spousal equivalents may pool their money to meet requirements

All amendments were cut and dry except for rule 1. Additional statements from the chairmen and commissioner clarified rule 1, but ultimately raised more questions than answers for new potential investors.

Rule 1 states that a natural person can become accredited with the specific licenses mentioned above or with additional educational proof. Our concern, that the SEC acknowledged, is that “most who hold the specified professional licenses are already accredited investors by virtue of their wealth.” The purpose of making additional amendments is defeated if no one new is included. If someone wishes to propose their capability to invest in private markets without the 3 licenses above, this requires the SEC to decide on a case by case basis who is and is not eligible along with which arbitrary credentials satisfy the SEC’s standards. This is very messy, and the SEC is aware.

It is most certainly a net positive that the SEC acknowledged these questions and concerns, but awareness does not solve dilemmas. Luckily, the SEC announced they would begin to publicly declare additional certifications as they see fit, but only time will tell. If you are looking for accredited investor status and plan to submit your credentials to the SEC or know someone that is, the Wolf Team would like to stay updated to hear about the process.

Sources:

Commissioner Roisman’s Statement: https://www.sec.gov/news/public-statement/roisman-statement-amendments-accredited-investor-definition

Press Release: https://www.sec.gov/news/press-release/2020-191

Entire PDF: https://www.sec.gov/rules/final/2020/33-10824.pdf