New SEC ‘accredited investor’ rules a game-changer for small investors

The US Securities and Exchange Commission (SEC) has announced it will be making changes to who qualifies as an ‘accredited investor’. Having accredited investor status has been an historic requirement and a principal test for deciding who could participate in private capital markets in the US. In very simple terms, this means that the overwhelming majority of people have always been locked out of most of the most lucrative investment opportunities, because they were not already wealthy

The existing criteria to be an accredited investor in the US are an annual income of US$200,000 for at least the last two years, or a networth of over $1million. Currently, only 3.65% of US citizens earn over 200,000 per annum – and 90.85% earn less than $100,000.

The SEC’s changes to who it will acknowledge as a qualified investor will move the emphasis away from a specific measure of income and existing wealth, and more towards someone’s overall financial sophistication – or stated more simply, will ask ‘‘are you smart enough?’. In its statement, the SEC says the amendments “update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets.” According to SEC Chairman Jay Clayton. “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”

So how will the new accredited investor definition impact the crypto sector? At Uphold, CRO Robin O’Connell says the SEC changes are a step in the right direction as they allow “for increased opportunity and access to investments that were previously just offered to the privileged few.” Zcoin founder Poramin Insom says accredited investors have had a direct impact on the security tokens offerings market – especially in the case of Regulation D offerings. The result of changes to the qualified investor definition then, “will allow additional investors to pour into this essential market, helping smaller projects get off the ground."

At Celcius Network, CEO Alex Mashinsky’s take is more cautionary. “Crypto has been one of the very few unregulated places all such people could participate without already being rich,” he says. “99% of the population has been excluded from getting access to the best innovation this country has to offer, so the question now is whether the regulators will require accreditation for retail users to do what they already do – or will the SEC let what is going on continue.”

The new SEC accredited investor definition

Updates on the definition of an accredited investor will focus on a revision of Rule 144A Rule 215 and Rule 501(a) of the U.S Securities Act of 1933. Included in the Rule 501(a) changes are:

• The addition of a new category to the qualified investor definition permitting natural persons to qualify as accredited investors based on their professional certifications, designations or credentials. The SEC has not stated exactly what those certifications will be, but one assumption would be lawyers, accountants, financial advisors and other similarly qualified people may now qualify. Some examples quoted by the SEC with reference to investments in private funds, are natural persons who are “knowledgeable employees” of the fund. Also state-registered investment advisers, exempt reporting advisers, and rural business investment companies may also qualify.

• A clarification that limited liability companies with $5 million in assets may be accredited investors and the addition of a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.

• The addition of 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.

• Adding the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. In essence this means life partners – married or not.

Changes to the rules are not law yet, as they have not appeared in the US government’s Federal Register and would not be binding until 60 days after having been published there.