Rules for Accredited Investor Status

In August 2020, the Securities and Exchange Commission (SEC) adjusted its definition of an “accredited investor” for the first time in decades. This ruling affects regular investors and self-directed IRA investors. Before this ruling, if you were an investor that did not meet income or net worth criteria, you may not have been allowed to invest in private, alternative assets regardless of your financial knowledge. These new amendments improve the definition of identifying individual investors with the knowledge and expertise to participate in those markets.

Accredited Investor Requirements

• Annual income exceeding $200,000 (or $300,000 joint income) for the previous two years and the expectation to earn an equal or higher income in the current year
• Net worth exceeding $1M (individually or jointly)
• General partner, executive officer, or director for the company issuing unregistered securities
• An entity qualifies if it is a private business development company or organization with $5M in assets or more
• An entity qualifies if its owners are accredited investors – however, an organization cannot be formed with purchasing specific securities as its sole purpose

The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.

Accredited Investor Requirement Amendments

• Natural individuals with professional certifications, designations, or credentials designated by the SEC Commission and issued by an accredited educational institution (professional certifications include individuals in good standing of the Series 7, Series 65, and Series 82 licenses)
• Spousal equivalents, opening the option to pool assets to qualify as accredited investors
• Natural persons who are knowledgeable employees of a private fund
• Entities with at least $5M in assets with SEC and state-registered investment advisors, exempt reporting advisers, and rural business investment companies (RBICs)
• Entities that own investments as defined in Rule 2a51-1(b) under the Investment Company Act with $5M or more in assets not formed for the sole purpose of investing in securities offered
• Family offices that have at least $5M in assets under management and family clients (each term is defined under the Investment Advisers Act)

This rule directly applies to self-directed IRA investors. Many self-directed IRAs invest in private equity or private placements; the underlying IRA owner must qualify as an accredited investor. The new definition allows more investors’ eligibility to invest in these types of assets.

The modernization of the rules is a welcome improvement. This ruling will become effective on October 25, 2020.

Click here to read the official SEC Announcement.

For more information about the accredited investor requirements, or to open a self-directed IRA account, contact Midland at (239) 333-1032 or visit www.midlandtrust.com.