The expanded definition of an Accredited Investor finalized by the Securities & Exchange Commission on Aug. 26, 2020, may sound encouraging, but will it really be all that helpful for Syndicators raising money from private individuals (otherwise known as “Retail Investors”)*?

It is not likely. Let’s take a closer look at the SEC’s actions and what it all means.

According to Investopedia, “the retail investment market in the United States is huge. Over 50 million households are retail investors of some kind, and over 50% of households have savings accounts or investment plans like 401(k)s.”

If you’re a Syndicator, this is a target market for investors in your investment opportunities. While some Syndicators gravitate toward institutional investors and the additional costs and complications that presents, others find gold in the millions of Retail Investors they can reach out to on social media and general networking events.

So there was hope the new rule and definition would broaden that pipeline even further.

The SEC first issued proposed amendments to the definition of an Accredited Investor3 on Dec. 18, 2019. The Final Rule was issued on Aug. 26, 2020, and it becomes effective 60 days after publication in the Federal Register.

The accompanying chart (found on the backside of this page) provides a synopsis of the previous and expanded rules for both Retail Investors and Non-Retail Investors.

So why does this not seem to be much help to your money-raising efforts?

While the SEC can be applauded for actually passing a new rule in the age of COVID, it seems that the new rule isn’t the panacea it could have been with respect to Retail Investors. More work is needed to further expand the definition to include other qualified professionals before it becomes more than marginally useful for Syndicators raising money from Retail Investors.

The SEC’s press release summarizing the rule can be found here: https://www.sec.gov/news/press-release/2020-191

The 166-page Final Rule can be found here:https://www.sec.gov/rules/final/2020/33-10824.pdf

CHANGES TO DEFINITION OF ACCREDITED INVESTOR (as of Aug. 26, 2020)

RETAIL INVESTORS / PRIVATE INDIVIDUALS

Included in previous definition:

  • Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 (with certain exclusions for equity in a primary residence or indebtedness incurred within 60 days prior to the investment);
  • Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
  • Any entity in which all of the equity owners are accredited investors; and
  • Any director, executive officer, or general partner of the issuer of the securities be-ing offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.

Additionally included to definition:

  • Natural persons with Series 7, 65 or 82 securities licenses, although the SEC has re-served the ability to add others by order who hold certain professional certifications and designations, or other verifiable credentials issued by an accredited educational institution (sorry, doctors, lawyers, CPAs and finance professionals who don’t already meet the income or net worth requirements didn’t make the cut);
  • A “knowledgeable employee” of a private fund for the purposes of investing in the fund; and
  • “Spousal equivalents” may now pool their finances for the purpose of qualifying as accredited investors.

NON-RETAIL INVESTORS / INSTITUTIONAL INVESTORS

Included in previous definition:

  • A bank, insurance company, registered investment company, business development company, or small business investment company, a securities broker-dealer; or
  • An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of Five Million Dollars ($5,000,000); or
  • A charitable organization, corporation, or partnership with assets exceeding Five Million Dollars ($5,000,000); or
  • A business in which all the equity owners are accredited Investors; and• A trust with assets in excess of Five Million Dollars ($5,000,000) that was not formed to acquire the Units.

Additionally included to definition:

  • Clarification that limited liability companies with $5 million in assets may be ac-credited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
  • A new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “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 securi-ties offered; and
  • “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.

*Retail Investors include non-professional individual investors who purchase securities for their own account. According to Investopedia’s definition of a Retail Investor, “the retail investment market in the United States is huge. Over 50 million households are retail investors of some kind and over 50% of households have savings accounts or investment plans like 401(k)s.” 3 See 17 CFR 230.501(a) aka Regulation D, Rule 501(a)

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