SEC expands accredited investor definition

In order to participate directly in private equity markets, individuals must meet the Security Exchange Commission’s definition of an “accredited investor.” Now, new rules have expanded that definition, opening a few more opportunities for investment in private equity and hedge funds.

Previously, requirements were based largely on financial status. An individual needed an annual income of at least $200,000 (or $300,000 combined with a spouse) and a net worth of at least $1 million, not including one’s primary residence, to qualify.

Effective late last year, the SEC ruled that investors who can demonstrate a certain level of professional knowledge or certification will also be able to participate in private market alternative assets.

A statement from the SEC indicated that wealth would no longer be the sole means of establishing accredited investor qualifications.
Now, individuals who do not meet those wealth standards qualify if they hold certain certifications, including Series 7, Series 65 and Series 82 licenses. The rule also broadened the definition of accredited investor to include limited liability companies, family offices, Native American tribes, and governing bodies with at least $5 million in assets or assets under management.

Some critics suggest the requirements are still too restrictive and limit capital available to smaller companies. Conversely, others argue the standards are too loose because they have not changed with inflation, thus allowing more investors to participate in risky private investments.

Investors who do not meet the accredited investor definition can still participate in alternative assets through private equity exchange-traded funds. Talk to your advisor about diversification strategies and whether they make sense for you.