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Slowly but surely, the U.S. government is steadily expanding the opportunity for more and more Americans to participate in private capital markets. Since the end of the Great Depression, U.S. regulations have generally barred individual investors (i.e. natural persons) from participating in the nation’s private markets unless they were “accredited investors”, which meant that they were wealthy enough to take on the risk of investments and possibly lose the entirety of their investment without compromising their financial stability.
Until recently, an individual only qualified as an accredited investor if (i) the individual’s net worth or joint net worth with his spouse exceeded $1,000,000.00 (not including primary residence) or (ii) the individual’s income was in excess of $200,000 (or $300,000 if married) in each of the two most recent years prior to the making an investment and this individual had a reasonable expectation of reaching the same income level in the current year.
However, on August 26, 2020, the Securities and Exchange Commission (SEC) issued new rules expanding the definition of an “accredited investor” for both individual and institutional investors. For individual investors, the SEC has now placed more emphasis on “financial sophistication” over an individual’s net worth. Under the new rules, individual accredited investors now include:
- individuals who hold relevant finance industry certifications like Series 7, Series 65, or Series 82 licenses. The SEC said that list could evolve over time;
- For purposes of investing in a private equity or venture capital fund, “knowledgeable employees” of that vehicle—such as an executive officer, a partner, or a board member—would meet the new standard;
- Other rule changes further open the pool of accredited investors. For example, “Spousal equivalent” was added to the new definition to allow investors and their spouses (or equivalent partners) to pool their finances for the purpose of combining their net worth to qualify as accredited investors. Family offices with assets of at least $5 million will now qualify, as will family clients of those offices.
The new rules also expanded the definition of institutional investors. The term “qualified institutional buyer” now includes rural business investment companies (“RBICs”) in Rule 501(a)(1). Section 384A of the Consolidated Farm and Rural Development Act defines an RBIC as a company approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary. RBICs’ purpose is to promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in such areas. Due to their similarity in purpose (i.e. promoting access to capital) with small business investment companies (SBICs) (already defined as accredited investors under Rule 501(a)(1)), RBICs are now included as “qualified institutional investors”.
The SEC also added a new category of accredited investor for Entities Meeting an Investments-Owned Test. This category covers entities owning “investments” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million, and that is not formed for the specific purpose of acquiring the securities being offered. This category includes groups such as Indian tribes, labor unions, governmental bodies, and funds, and entities organized under the laws of a foreign country.
We still have a long way to go in providing access to private capital markets to the average American. However, Zhemian Ventures, as an advocate for Equal Access and Opportunity, believes these new rules are a positive step in the right direction of empowering more Americans to achieve financial freedom by giving them access to private markets.
(Source: SEC Releases Nos. 33-10824; 34-89669)