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Are You an Accredited Investor? SEC Expanded Definition

In August 2020, the SEC proposed a new, expanded amendment to the definition to be qualified as an accredited investor. The proposed amendment updated and improved the definition to better identify institutional and individual investors that have the prior knowledge and expertise to invest in private placements such as our real estate syndication investments. The amendment officially went into effect on December 8, 2020.

In the original accredited investor definition, in order to be an accredited investor, you had to meet either a net worth or annual income requirement.

Net Worth Requirement – To meet the new worth requirement, you must have a net worth of $1 million or more not including your primary resident.

Annual Income Requirement – To meet the income requirement, you must have at least $200,000 of annual income if you are single and $300,000 of annual income if you are married. This annual income must have been achieved for the last two years and you have a reasonable expectation that it will continue.

The expanded definition still includes these two net worth and annual income requirements so if you already meet at least one of these criteria then nothing has changed for you.

If you don’t meet these requirements, then let’s review the expanded SEC accredited investor definition in more detail.

Professional Certifications and Designations

If you have passed the Series 7, Series 65, or Series 82 and hold, in good standing, one of these designations then you are now an accredited investor based on these new, expanded SEC guidelines.

It is likely that most of you reading this have no clue what those exams are and do not hold those designations. Here is a better description:

  • Series 7 – Licensed General Securities Representative;
  • Series 65 – Licensed Investment Adviser Representative; and
  • Series 82 – Licensed Private Securities Offerings Representative.

It is unlikely that you hold any of these designations so you might be asking why is this important. Read further and I will explain how one of these exams is available for you to study for and take so you can become an accredited investor.

Knowledgeable Employees

This allows “knowledgeable employees” the opportunity to be classified as an accredited investor only for investing in their employer’s security offerings. This would include directors, certain executive officers of the private fund, or an affiliated person of the private fund that manages investment activities of the private fund. This would also include employees who participate in the investment activities of the private fund.

Family Clients of Family Offices

If you are a natural person and you are a family client of a family office, you can now qualify as an accredited investor.

In order to meet this requirement, you must come within the definition of a “family” client in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940 (the “Advisers Act”), and be a family client of a family office that itself qualifies as an accredited investor. Also, your investment must be directed by a person who has the knowledge and experience in financial and business matters that the family office can evaluate the merits and risks of the prospective investment.

Limited Liability Companies

This new, expanded SEC accredited investor definition has now clarified a long-standing staff interpretation that allows limited liability companies with more than $5 million in assets to qualify as an accredited investor. These limited liability companies may not be formed for the specific purpose of acquiring the securities being offered.

Other Entities

There are a few other types of entities that qualify now including rural business investment companies, but these are highly unlikely to apply to you.

Fastest Way to Qualify without Being a Millionaire or have a High Income

Earlier we mentioned the professional certifications and designations that were now considered in order for you to qualify as an accredited investor. These three exams are now an alternative way to qualify but require many hours of study prior to taking the exams.

If you want to consider being an accredited investor by taking one of these exams, then I would recommend the Series 65 which is basically the exam that allows you to become a licensed, registered investment advisor. The Series 65 exam is the only exam that does not require you to be sponsored by a registered financial services firm and the other exams should only be considered if you are considering a career in that field.

The Series 65 covers topics such as economic factors, business information, investment vehicle characteristics, investment recommendations and strategies, laws, regulations, and other guidelines.

It is fairly simple to purchase an online study guide for around $400 and study the material for 40-60 hours in order to prepare for the exam. The exam consists of 130 questions and you will have 3 hours to take the exam. You only need to answer 94 of the questions correctly to achieve a 72% or higher to pass the exam.

Once you pass the exam you will also need to be licensed as an investment adviser representative in your state and would need to comply with all state-specific licensing requirements.

Obviously, this might not be the “easiest” way to achieve accredited investor status but it certainly could be the fastest way so you can reach the income and/or net worth requirements sooner.

If you are considering or have further questions about taking the Series 65 exam, then feel free to email Andrew Davis, andrew@passiveinvesting.com, Investor Relations Consultant, as he is currently going through the process of studying and taking the Series 65 exam so he can speak first-hand about the process.