As of December 8, 2020, the definition of an “accredited investor” for the purposes of investing in certain private capital has been expanded. Do you qualify under the new definition to access additional private investment opportunities? Let’s take a look at what an accredited investor is and how to update your status with MicroVentures if you qualify.
What is an accredited investor?
“Accredited investors” is a term defined in Rule 501(a)—and also found in Rules 215 and 144A—of the Securities Act of 1933. This term describes the individuals and entities that are allowed to participate in investment opportunities offered under exemptions that do not have the disclosure, procedural, and investor protection requirements provided by registration under the Securities Act of 1933.
The SEC has historically maintained that the accredited investor definition is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act’s registration process unnecessary.”
In short, you need to qualify as an accredited investor in order to invest in most venture capital investing opportunities (aside from Regulation Crowdfunding, which is open to accredited and non-accredited investors).
Who qualifies as an accredited investor?
The former definition of an accredited investor applicable to a natural person was broadly based on net worth and income qualifications. However, the newly amended definition is based on the SEC’s determination that wealth should not be the sole means of establishing financial sophistication. The updated definition of an accredited investor expands the existing qualifications with amendments to revise Rules 501(a), 215, and 144A of the Securities Act.
In general, the SEC now allows individuals to qualify as an accredited investor based on certain professional certifications, designations, or credentials, as well as if they are “knowledgeable employees” of a private fund (with respect to an offering for that fund). Additionally, the existing income and net worth qualifications that apply jointly to an individual and his or her spouse are now expanded to include a “spousal equivalent,” which is defined as a cohabitant with a relationship generally equivalent to that of a spouse.
Also, certain non-natural person entities (such as limited liability companies, Indian tribes and governmental bodies, and “family offices”) may now also qualify as accredited investors if they meet certain minimum asset or investment ownership qualifications described in the amendments.
Summary of New Criteria
In summary, the expansion includes the following as new qualifications for being an accredited investor:
- Persons holding certain professional certifications, designations, or credentials
- “Knowledgeable employees” of a private fund
- Limited liability companies and certain other entities with $5 million minimum assets
- Certain qualified entities, such as Indian tribes and governmental bodies, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million
- “Family offices” with minimum $5 million in assets under management that meet certain requirements
- “Spousal equivalents” allowed to pool finances for the purpose of qualifying as accredited investors under the rules for joint finances
In order to qualify as accredited, these entities cannot have been formed for the purpose of acquiring their target investment.
Professional Certifications, Designations, or Credentials
Regarding the professional certifications, designations, or credentials qualification, the final rule (Pages 28–29) states that a separate order will designate the following as the first licenses allowed under the new definition:
- The General Securities Representative license (Series 7)
- The Private Securities Offerings Representative license (Series 82)
- The Licensed Investment Adviser Representative (Series 65)
The SEC’s fact sheet on the final rule further explains that the SEC has the “flexibility to reevaluate or add” certifications, designations, or credentials in the future. Additionally, “[m]embers 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.”
You can view the SEC’s August 26, 2020, press release and the final rule for details.
How do I update my investor status on the MicroVentures platform?
If you’re new to MicroVentures, you can get started on our signup page. Choose “Accredited” when prompted while you’re setting up your account. You’ll then schedule a brief call with the Investor Relations team to verify your accredited investor status.
If you’re already on the MicroVentures platform and now believe you qualify as an accredited investor, you can gain access to private offerings by verifying your eligibility. Simply email the Investor Relations team at firstname.lastname@example.org to set up a brief phone call. We’ll verify your eligibility over the phone and update your account status.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.