The Securities and Exchange Commission has voted to update its definition of accredited investor, changes that are expected to expand the pool of individuals and entities eligible to participate in the private capital markets.

Accredited investor is a key test the SEC uses to identify institutions and individuals the agency deems to be financially sophisticated enough to protect their own interests. Those who qualify are able to participate in investment opportunities not available to other investors, including certain offerings by hedge funds and private equity funds.

Individuals

The SEC currently has income and net-worth tests that define an accredited investor. These include a net worth for individuals, or joint net worth with that person's spouse, that exceeds $1 million. An individual whose income is in excess of $200,000 in the two most recent years, or a joint income with their spouse over $300,000, also qualifies as an accredited investor.

The SEC’s proposed amendments would add the term “spousal equivalent” to the accredited investor definition, allowing spousal equivalents to pool their finances for the purpose of qualifying as accredited investors. The amendments would also add new categories of accredited investors based on professional certifications and designations. For example, investors who hold a Series 7, 65 or 82 license would automatically qualify as accredited investors, regardless of whether they meet the net worth or income thresholds.

With respect to investments in a private fund, the amendments would create a new category based on the person’s status as a “knowledgeable employee” of the fund.

Entities and Institutions

Certain entities, such as banks and insurance companies, currently qualify as accredited investors. The proposed amendments would add LLCs that meet certain conditions to the list of entities that may qualify as accredited investors, as well as registered investment advisers and rural business investment companies.

The amendments would also add a new category for any entity, including Indian tribes, owning investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered. “Family offices” with at least $5 million in assets under management and their “family clients” would also be eligible.