SEC Changes in Accredited Investor Definition
Last year, the Securities and Exchange Commission (SEC) amended the definition of “accredited investor” to to expand the definition beyond specific income or net worth tests. This is important because the sale of securities requires registration under the Securities Act of 1933 (“Securities Act”) or an exemption from registration, and most exeptions require that an investor meets the definition of “accredited investor.” This revised definition of an accredited investor will allow more individuals to become eligible for private investment opportunities (the exemptions to the rule) which is good news for start-ups and companies that look for investors.
Before these revisions, most of those who qualified as accredited investors did so by meeting income or net worth requirements (also known as the “wallet test”). In short, individuals would be considered accredited investors by meeting either of these requirements:
- annual income of $200,000 ($300,000 for joint income) or more in the 2 most recent consecutive years, with the expectation of earning the same or more in the current year; or
- net worth exceeding $1 million, either individually or jointly with their spouse (excluding the value of the person’s primary residence).
Now, the definition is expanded to include those with knowledge and expertise in business and financial matters. Summarized below are the key additions to the definition of accredited investors:
- Knowledgeable employees of certain private or mutual funds only for offerings by the private fund and other private funds that are managed by their employer
- An individual holding a Series 7, 65, or 82 license in good standing
- An entity that is a private business development company or organization with assets exceeding $5 million or that consists of equity owners who are accredited investors
- Family offices with at least $5 million in total assets under management and family clients
- New definition of “spousal equivalents” (domestic partners, partners in civil union) so that spousal equivalents may pool their assets to qualify
For more detail, please check the SEC’s website announcement of these changes here.
This article lays out certain recent revisions the SEC has indicated it will make to the definition of “accredited investor,” but please note that this post (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from qualified professionals.
José Padilla is an attorney and the owner of Padilla Law PLLC, where he represents startups and investors. His practice focuses on formation, seed and VC financings, private equity, acquisitions, strategic corporate transactions, and general advisory regarding corporate and financing strategy.