Further Expansions to “Accredited Investor” Definition

Published on October 8, 2020

Last month, the Securities and Exchange Commission amended its “accredited investor” definition that goes beyond income and net worth criteria; the expanded definition allows investors to qualify based on defined measures of professional knowledge, experience, or certifications. There is also an expanded list of entities that may qualify as an accredited investor, including tribal governments, family offices and certain other organizations.

This status allows individuals to participate in private placements—equity investments such as those allowed in self-directed IRAs. This amendment to the final rule aligns with self-directed investing in another way—using an investor’s knowledge or experience as a basis for participating in investment opportunities. Self-directed investors make their own investment decisions about the alternative assets they wish to include in their retirement plan, based on what they have researched, know, and understand—decisions not based solely on wealth.

The SEC’s previous rule used income or net worth as factors of financial sophistication—individuals had to meet the test of a net worth of at least $1 million excluding the value of primary residence, or income of at least $200,000 each year for the last two years (or $300,000 combined income if married). The amended rule goes beyond wealth as the criterion for purposes of the accredited investor definition.

What the amendments include
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act to:

• Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund
• Clarify that limited liability companies with $5 million in assets may be accredited investors
• Add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs)
• Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries
• Add family offices with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
• Add the term “spousal equivalent” so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors

Self-directed IRAs for investors of all kinds
Several years ago, the SEC implemented the JOBS Act in full, which opened up equity crowdfunding platforms to even more individuals, including nonaccredited investors who did not meet the income/net worth tests but wanted to take advantage of equity funding opportunities. For those who want to be angel investors in an early-stage company and/or wish to participate in equity crowdfunding platforms, a self-directed IRA is a valuable vehicle for making these types of investments. The flexibility of these retirement plans and the many non-publicly traded, alternative assets, they allow offer a great way to build a diverse retirement portfolio—and a hedge against stock market volatility with potential to earn greater returns.

At Next Generation, we’re here to help our clients understand the many options available to them as self-directed investors. If you’re wondering what types of investments you can include in a self-directed retirement plan, or have questions about how private equity/private placements can be part of your self-directed portfolio, you can sign up for a complimentary education session to learn more about this retirement wealth-building strategy. You may also contact our team directly with questions, via phone at 888.857.8058 or via email at NewAccounts@NextGenerationTrust.com.