Achieving accredited investor status opens doors for building wealth. Formerly, only investors with high net worth and incomes could meet the requirements. However, recent SEC rule changes create avenues to accreditation for investors with experience, even if they have not yet made their fortune. Read on to learn about the new SEC accredited investor rules in 2021.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
SEC Accredited Investor Expansion
The SEC expanded its definition of accredited investors in rules promulgated on August 26, 2020. The new rules went into effect on December 8, 2021, just in time for newly accredited investors to expand their holdings in the new year.
The expansion makes more investors eligible for private offerings, which is crucial for those who want to make a career or a lucrative second source of income from investing. The previous rules were in place with very few changes for 35 years, centering around the principle that only the wealthy or high earners should risk private offering investment. While the rules were intended to protect unsavvy investors, they also hindered economic participation beneficial to investors and businesses.
Investor Criteria Changes
In the recent accredited investor rule expansion, the SEC kept previous criteria reliant on income and net worth thresholds but augmented them to include traits previously associated with sophisticated investors.
Professional Certifications
Those who possess certain professional licenses or certifications now qualify as accredited investors. In the round of rules issued August 26, 2020, the SEC designated three specific licenses eligible:
- Licensed General Securities Representative (Series 7)
- Licensed Investment Adviser Representative (Series 65)
- Licensed Private Securities Offerings Representative (Series 82)
In addition to holding one of the above licenses, an individual must also comply with any state-specific licensing rules and maintain the license in good standing. This category is open to expansion and may include additional license types in the future.
Knowledgeable Employees
The SEC recognized that individuals employed to manage investments are sufficiently sophisticated to be considered accredited investors. To qualify, an employee must meet two criteria.
First, one must be a “knowledgeable employee” as defined in the Investment Company Act of 1940. These employees may include executive officers, trustees, general partners, and other similar positions. Alternatively, anyone who participates in investment activities as part of their job duties may also be considered a knowledgeable employee. Clerical employees or anyone performing administrative work does not meet the requirement.
Second, the place of employment must be a private fund issuer. A private fund issuer is a company that would be an investment company were it not for the exclusions created in section 3(c)(1) or section 3(c)(7) of the Investment Company Act.
Under this section, knowledgeable employees who qualify as accredited investors may only invest in private offerings managed by their employer. The accreditation does not transfer to any outside investments.
Expansion of Entities’ Eligibility
While the above changes apply to natural persons, the amendments also address the accreditation status of some entities. Some legal entities, for instance, have long enjoyed the same financial privileges as natural persons, but the SEC excluded others or allowed their position to be ambiguous. These rules clarified or created accreditation qualifications for several groups.
Family Clients of Family Offices
Family offices and family clients of family offices can now achieve accredited investor status.
Family offices are legal entities created by wealthy families. The family offices manage wealth and render services to the family members. The entity must meet the definition of a family office in Rule 202(a)(11)(G) of the Advisers Act to qualify for accredited investor status.
Family clients are people who are current or former family members of the subject family office. Family clients can also be key employees, former key employees, estate planning vehicles, and non-profit foundations. To qualify as a family client, the client must have their investment directed by someone knowledgeable enough to evaluate the risks and rewards of a deal.
Other Entities
Several other types of entities also received a route to accreditation:
- Native American tribal entities that own more than $5 million in investments as defined by Rule 2a51-1(b) of the Investment Company Act, providing it was not formed specifically to acquire securities.
- Limited liabilities companies can be accredited investors if they meet the other requirements. Previously, the SEC did not explicitly include LLCs as entities eligible for accredited investor status.
- Rural business development companies.
- Investment advisers registered under Section 203 of the Investment Advisers Act.
Final Thoughts
With these new accredited investor rules, the SEC opened the world of private offerings to skilled investors rather than limiting it to those already wealthy. In addition to having more options, newly accredited investors will also find it easier to source deals. For example, accredited investors qualify for Rule 506(c) real estate syndications.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
