SEC Expands the Definition of an Accredited Investor

Huilin Yang
Feb 10th

The SEC expanded the definition of an Accredited Investor, effective December 8, 2020

 

EquityZen is excited to welcome newly-qualified accredited investors to the private markets. At EquityZen, we’re proud to have supported the expansion of the Accredited Investor definition, along with many others, by submitting a response to SEC’s call for comment - you can read our open letter here

 

The changes to the definition allow more investors to have access to pre-IPO companies. We believe this to be an exciting development, since more and more value has been created in the private markets instead of the public markets in recent years - check out the chart below for a visualization of this trend.

 

 

 

The graph above displays how value creation from 1986 through 2018 has shifted from the public markets (green) to the private markets (gray). Roku's private valuation multiple based on Series B to IPO. Companies shown may not be actual portfolio investments of any EquityZen fund. Past performance does not guarantee future results.

 

If you’re wondering what this means for you, we have a quick primer below.

 

Why does it matter if I’m an Accredited Investor or not?

There are certain investment opportunities that the SEC limits to accredited investors. This is because these investments are exempt from disclosing certain information to investors and may involve unique risks that a registered offering (e.g. public stocks) does not have. For example, pre-IPO investments may be illiquid, speculative, or in companies with less experience and that are dependent on key managers. They may not be right for everyone.

 

By expanding the definition of an Accredited Investor, the SEC has made it possible to better recognize investors who may be able to better evaluate those risks, which gives an opportunity to a broader investor base to participate in exempt offerings previously only available to institutional and high-net worth accredited investors.

 

EquityZen provides access to private companies via our single company and multi-company investment funds, which are examples of investments that are limited to accredited investors, as required by the SEC.

 

What was the previous definition of Accredited Investors for individual investors?

If you’re investing as an individual (i.e., not through an investment entity such as a Trust or an LLC), the previous definition of Accredited Investors meant that you had to meet one of these criteria:

  • Your income exceeded $200,000 (or $300,000 with your spouse) in each of the past 2 years and you expect the same this year.
  • Your net worth (or your joint net worth with your spouse) exceeds $1M, exclusive of the value of your primary residence.

The above tests have generally been known as financial threshold tests.

 

What’s the new definition of Accredited Investors for individual investors?

The new definition of Accredited Investor includes the same financial thresholds as above, but now the joint income and net worth may be included from spouses and “spousal equivalents”. 

 

The SEC views a spousal equivalent as a cohabitant occupying a relationship generally equivalent to that of a spouse. 

 

Additionally, the SEC added the following new categories: 

  • You have an SEC approved credential. The current list of approved credentials are: Series 7, Series 65 or Series 82, though the SEC may add to this list in the future by way of an official order. 
  • Family client” of a “family office” whose investment is directed by the family office. Both of these terms are defined in Rule 202(a)(11)(G)-1 of the Investment Advisers Act of 1940. 
  • Knowledgeable employees of private funds investing in those funds. A “knowledgeable employee” is defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940.

If you meet any one of these criteria, you’re now considered an Accredited Investor. 

 

What’s changed for entity investors?

If you’re investing via an entity (e.g., via a Trust or an LLC), the definition of an Accredited Investor has also expanded! If you fall into one of these categories, you’re now considered an Accredited Investor:

  • An entity owning investments in excess of $5 million, not described in any other category, and that was not formed for the specific purpose of acquiring the securities offered.
  • A “family office” that
    • has total assets under management in excess of $5 million; 
    • was not formed for the specific purpose of acquiring the securities offered, and 
    • whose prospective investment is directed by a person with such knowledge and experience of financial and business matters such that the family office is capable of evaluating the merits and risks of the prospective investment.
  • An investment adviser registered with the SEC or pursuant to the laws of any U.S. state.
  • An investment adviser relying on the exemption from registering.
  • A “rural business investment company”.
  • Limited liability company not formed for the specific purpose of acquiring securities offered and that has total assets in excess of $5 million.

 

What was the previous definition of Accredited Investor for entity investors?

If you fall into one of these categories, it means that you were previously an Accredited Investor (and still are!):

  • An entity, where each of its equity investors are accredited investors.
  • A corporation, Massachusetts or similar business trust, partnership,, or a non-profit organization, that: (i) was not formed for the specific purpose of acquiring the securities offered; AND (ii) has total assets in excess of $5,000,000.
  • A revocable trust where all of its grantors are accredited investors.
  • A trust with total assets in excess of $5,000,000 that was not formed for the specific purpose of acquiring the securities offered, and the investment decisions for which are made by a sophisticated person capable of evaluating the merits and risks of the proposed investment.
  • A registered broker or dealer.
  • A registered “investment company”. 
  • A business development company.
  • A private business development company.
  • A small business investment company.
  • An “employee benefit plan” within the meaning of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) (other than a participant-directed plan) and either (i) the investment decision is made by a plan fiduciary that is a bank, savings and loan association, insurance company or registered investment adviser, OR (ii) the plan has total assets exceeding $5,000,000.
  • A plan established and maintained by a State, its political subdivisions, or an agency or instrumentality of a State or its political subdivisions, for the benefit of its employees, and such plan has assets in excess of $5,000,000.
  • An insurance company.
  • A bank, or a savings and loan association or other institution defined in Section 3(a)(5)(A) of the Securities Act, in each case acting for its own account or acting in a fiduciary capacity.

 

Conclusion

We’ve covered the SEC changes to the definition of Accredited Investors and how they may impact you.

 

Here at EquityZen, we believe in private markets for the public. We’ve built a platform that provides liquidity to shareholders as well as provides accredited investors access to pre-IPO, late stage technology investments at reasonable minimums via our investment funds. With this SEC change, we’ve rolled out corresponding updates to our platform to accept newly accredited investors.

 

If you’re interested in buying or selling shares of pre-IPO companies through an EquityZen fund, you can sign up for EquityZen here to explore our offerings. You can also check out our guide to investing in pre-IPO secondaries here.

 

Risks

Investments in the pre-IPO securities are illiquid investments for which sale is restricted, for which buyers may not be readily found, and which have risks, including the risk of loss. The fund is expected to invest in a private company with a limited track record that may compete against publicly traded companies or other better established competitors, and that are dependent on key managers. Such investments may be speculative, and there can be no assurance that any private company will go public or be acquired, or that any IPO or acquisition will result in a successful investment. You can learn more about the risks of investing here

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