Saint Louis, MO., Sept. 15, 2020 – On August 26th, the U.S. Securities and Exchange Commission (“SEC”) amended, or perhaps better said, broadly expanded its definition of individuals and organizations that will now qualify as an accredited investor. The new, and much more inclusive amendment to Rule 501(a) of the Securities Act, is set to take effect later this year.

While the new changes will now qualify such natural persons as “knowledgeable employees” of a private fund and/or financial professionals holding certain securities licenses (e.g. – Series 7, 65 and 82), one of the more notable amendments for retail investors will be the addition of “spousal equivalents” wherein a “cohabitant occupying a relationship generally equivalent to that of a spouse” may now be considered for the purpose of pooling household finances as used to qualify an accredited investor.

In a press release from the SEC, the regulatory body states, “the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.”

Amongst others, a few relevant changes to the SEC’s list of Qualified Entities will now include SEC and state-registered investment advisors, Rural Business Investment Companies (RBICs), and Limited Liability Companies with total assets in excess of $5 million and not formed specifically for the securities being offered.

From the thirty-thousand-foot level, an individual may qualify as an accredited investor by satisfying any single component of the SEC’s defined income/net worth thresholds, which include earned income in excess of $200,000 (or $300,000 together with spouse/spousal equivalent) in each the past two years and with reasonable expectation to earn the same for the current year. Alternatively, one may have a net worth in excess of $1 million, either individually or combined with a spouse/spousal equivalent (excluding the value of a primary residence). Apart from the SEC’s newest additions, accredited investors have also historically included GPs, Executive Officers and Directors of the company issuing the unregistered securities.

Because certain securities (e.g., private placements) may be exempt from SEC registration, they are often times deemed to be inherently more risky simply because the issuing company and the security itself are not subject to the scrutiny and disclosure requirements of their counterparts, registered securities. To be certain, that’s not to say that such securities are in fact higher risk. However, the commission has a responsibility to protect the general investing public and elects to use the accredited investor status as a common safeguard. According to the SEC, the accreditation exemption seeks, “to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.”

The responsibility of qualifying accredited investor status falls solely on the company issuing the security and there are steps required by said company to follow compliance. No formal certification exists that can simply be handed over. Instead, issuing companies should require the release of an individual’s financial records, including W-2s, tax returns and bank/brokerage statements. In lieu of such documents and internal review, investors may also choose to simply have their CPA, investment broker, tax attorney or financial advisor issue a letter confirming such accredited status.

If you have any questions regarding accredited investor status, our team at Bamboo Equity Partners^TM would be happy to answer them for you.

Sources:

“Staff Responses to Questions About the Family Office Rule.” U.S. Securities and Exchange Commission, Updated as of Mar. 23, 2018, https://www.sec.gov/divisions/investment/guidance/familyofficefaq.htm

“SEC Modernizes the Accredited Investor Definition.” U.S. Securities and Exchange Commission, 26 Aug. 2020, https://www.sec.gov/news/press-release/2020-191. Press release.

“Updated Investor Bulletin: Accredited Investors.” U.S. Securities and Exchange Commission, Jan. 31, 2019, https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3