Last week, the SEC amended its definition of “accredited investor” to open the private markets to certain additional groups of retail investors.
Alternative investment funds such as hedge funds, private equity funds, real estate funds and venture capital funds will now have access to a broader pool of potential investors. Some investors that were previously disallowed from investing in these private funds due to financial metric limitations will now be able to share in the upside and downside of the private markets.
Prior to this change, the definition of accredited investor was tied to financial requirements. For instance, individual investors were required to have a net worth of at least $1 million (excluding their primary residence) or annual income of more than $200,000 ($300,000 if married filing jointly) for the past two consecutive years and were expected to have the same level of income in the current year.
Inclusions with the Amended Definition of “Accredited Investor”
Previously, accredited investors included banks, registered broker dealers and trusts with more than $5 million in assets and certain other entities. These financial metrics did not change.
Now the definition of accredited investor has been expanded to include others who are also considered knowledgeable or sophisticated investors. They include:
- Investors with certain professional credentials or certifications. Initially this incudes people that have Series 7, Series 65 or Series 82 licenses. However, the SEC has indicated that other professional certifications may be added later
- Knowledgeable employees of private funds
- Limited liability companies with $5 million in assets
- Family offices that have at least $5 million in assets under management
- Any entity that owns investments of at least $5 million
- SEC and state registered investment advisors including exempt reporting advisers
- The term “spousal equivalent” was added to the accredited investor definition so that spousal equivalents can combine their finances for the purpose of qualifying as accredited investors
The market reaction to this change has been mixed. Some feel that this will have no visible impact on the private markets because the definition has not really opened up a bigger pool of investors. But many fund managers are more optimistic about what this means to their fundraising efforts.
We would love to hear your thoughts on this change. Please connect with Weaver’s investment funds team on this and other related topics on our website or on LinkedIn. We also invite you to read the transcript from our latest Investor Roundtable: A 2020 Global Outlook.
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