Recently the Security Exchange Commission (SEC) updated what qualifies as an Accredited Investor. One of the most common questions I receive is, “what is the difference between an accredited vs. sophisticated investor?” These are two important classifications as it will dictate which deals you can invest in.
On previous blogs, I have written about the differences between 506(b) and 506(c) deal offerings, which are very common in syndication deals in raising capital for real estate investments. However, to summarize, a 506(b) offering can have unlimited accredited investors and take up to 35 sophisticated investors. These sophisticated investors, as defined below, must have pre-existing relationships with the deal sponsor. In a 506(c) offering, only accredited investors may invest in the deal. Sophisticated investors are not able to invest in these deals to stay in compliance with the SEC.
In August of 2020, the SEC made it possible for a sophisticated investor to become accredited without meeting the income requirement. This is great news for investors who are willing to take action on meeting these new changes for the opportunity to invest in offerings once reserved for investors meeting income requirements!
Prior to discussing the changes, let’s define an accredited and sophisticated investor prior to the changes.
Sophisticated Investor: An individual “determined” to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves. There is no income requirement to be a sophisticated investor, only experience and knowledge to determine if the deal is worth investing in.
Accredited Investor: An investor who has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Depending on which category you fall into, determines which offerings you can invest in…UNTIL NOW. The same definitions apply above; however, the accredited investor status can be fulfilled by the following per the SEC press release:
- add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
- Side Note: If you are not connected or directly licensed under a FINRA member firm, you may consider taking the Series 65 as you can take the test as an individual and not be sponsored by a FINRA member firm.
- include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
- clarify that limited liability companies with $5 million in assets may be accredited 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;
- add 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 securities offered.
- add “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; and
- add 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.
A big game changer on the press release, was using professional certifications, designations, or credentials to qualify as an accredited investor. Look into the Series 7, Series 65 and Series 82 licenses. Or if you already have one or more of these, CONGRATULATIONS, you are considered an accredited investor.
As author of Rich Dad Poor Dad, Robert Kiyosaki, said “if you can qualify as an accredited investor, you will have access to investments that most people do not.”