Securities and Exchange Commission Expands Definition of Accredited Investor


Securities and Exchange Commission Expands Definition of Accredited Investor

            The Securities and Exchange Commission (SEC) recently updated and expanded the definition of an ‘accredited investor.’  The old definition used a bright-line test based on net worth and income to determine whether an individual qualified as an accredited investor and enumerated specific types of entities that qualified as accredited investors.  The new definition expands the categories of individuals and entities that qualify as accredited investors to include certain investors who have demonstrated financial sophistication irrespective of their wealth.

The accredited investor definition is a fundamental element of the exemptions from registration under securities laws.  The central function of registration under the securities laws is to protect investors by requiring companies to make extensive disclosures.  Since compliance with registration can be very costly, there are exemptions to registration when an offering is limited to investors who presumptively understand the risks of investments, i.e., accredited investors.  It presumes that accredited investors can fend for themselves in making decisions about the investment opportunity.

Accredited investors have greater access to investment opportunities in private markets than non-accredited investors.  Examples of these investment opportunities include high-growth stage companies, hedge funds, private equity funds, and venture capital funds.  According to the SEC, the amendments to the accredited investor definition will:

  • add new categories of natural persons that qualify as accredited investors based on certain professional certifications or designations or other credentials, or with respect to investments in a private fund, as a “knowledgeable employee” of the private fund;
  • add certain entity types to the current list of entities that qualify as accredited investors and a new category for any entity with “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
  • add family offices with at least $5 million in assets under management and their family clients to the definition;
  • add the term “spousal equivalent” to the definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors; and
  • codify certain staff interpretive positions that relate to the accredited investor definition.

See Amending the “Accredited Investor” Definition, Release Nos. 33-10824; 34-89669 (Aug. 26, 2020).  The SEC also expanded the list of entities that are eligible to qualify as qualified institutional buyers.

There are many nuances to the matters described above.  For more information feel free to contact Dawn:  And thank you to Gabriel Courey, who drafted this client update.


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