Accredited Investor Now Defined Not Only by Wealth

The US Securities and Exchange Commission (SEC) made a historic decision yesterday as it unleashed the hands for individuals and entities previously banned from participating in private capital markets.

The regulatory institution, responsible for the fair and orderly functioning of the securities markets, adopted a critical amendment of the “accredited investor” definition yesterday. As stated in SEC’s public announcement, from now on individuals with professional financial knowledge or experience could be qualified as accredited investors as well.

For years the definition was only applied to the investors that met a certain level of income and net wealth. This means that a person must have either a net worth of $1 million or an annual income not less than $200k (or $300k joint income) for the past few years and the expectation of earning the same or even higher amount in the upcoming year.

The entities were acknowledged as accredited investors only if they were private business development companies or had assets worth over $5 million. In the meantime, anyone below the criteria has been denied the ability to invest in assets not traded publicly. According to Jay Clayton , the Chairman of SEC:

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.

The clear measures include professional knowledge, experience, or certifications in addition to the existing proofs of income. As stated in the report, the definition update also expands the list of entities.

From now on the entities that may qualify as an accredited investor include governmental bodies, funds, Indian tribes, family offices (with at least $5 million under management) as well as spouses or partners.

Historically the controversial rules behind the definition served as a barrier that aimed to protect investors from financial risks. The private markets were considered to be more volatile and riskier compared to the public ones. Accordingly, rich investors were supposed to be more sophisticated to evaluate such risks and the wealthy enough to survive possible losses. The opponents however accuse the accredited investors rule for being segregative and leaving some of the investment opportunities worth the wealthy investors only.

According to SEC, the amendment will come into force the 60 days after the announcement published in the Federal Register, thus approximately from the end of October 2020.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss


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