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September 2, 2020

New Definition of Accredited Investors

Last week the SEC officially announced that it is updating the definition of accredited investors. This was a pretty big deal because the current definition — individuals who make $200,000 annually ($300,000 if married) or have a net worth of $1 million — hasn’t been changed in 35 years. 

The Nitty Gritty

So what’s changed? A fair amount, actually. Much of it is related to institutions and financial services. “Knowledgeable employees” of private funds will be considered accredited investors now. Ditto for family offices and limited liability companies with at least $5 million in assets. Similarly, entities like Indian tribes, governmental bodies, and funds that have investments totalling $5 million or more are also included in the new definition.

But the biggest shake-up is at the individual investor level. Now, individuals can hold certain professional certificates in order to be considered accredited investors. The SEC stated that they will likely expand the list of qualifying certificates in the future (they also invited public feedback for suggestions). The SEC is starting with the Series 7, Series 65, and Series 82 licenses. These licenses are usually held by people who want to be able to sell investments themselves. Investopedia has a great piece that breaks down the various licenses and what they qualify a person to do/know. I definitely suggest reading it if you want a deeper view into how these licenses function.

Although just needing to hold three licenses sounds like a simple way to become an accredited investor, it’s not quite so easy. In order to take the qualifying exam for the Series 7 license, you first need to pass the Securities Industry Essentials (SIE) Exam (also a qualification for the Series 82). This exam is open to anyone who wants to take it and costs $60. However, things start to get a little more complicated after that. In order to take the Series 7 exam, you have to be sponsored by a FINRA member firm. The firm must submit an application on your behalf (and they usually cover the $245 exam fee as well). Once that’s done, you can actually take the exam. According to Investopedia, questions cover “topics on investment risk, taxation, equity and debt instruments, packaged securities, options, and retirement plans.” 

Obtaining the Series 65 license is a little simpler than the Series 7. You can be sponsored by a firm, or you can elect to take the exam on your own. The Series 65 test focuses on ethics and legalities associated with investing — things like communicating with clients, conflicts of interest, state regulations, and tax laws. It costs $175.

Lastly, there’s the Series 82 license. Series 82 is solely concerned with the private market. The exam covers types of private securities, the analysis of corporate securities (including debt analysis), and SEC regulations for disclosure and client communications. Like the Series 7, individuals need sponsorship in order to take the Series 82 exam. It is also the cheapest of all the exams at just $40. 

What It Means

This new definition doesn’t blow open the status of accredited investor to tons of Americans. But what it does do is designate many financial professionals as accredited investors (assuming they weren’t meeting the wealth qualifications). And that seems sensible since they deal with investments everyday. If anyone has enough knowledge and understanding to judge a good investment from a bad one, it should be them.

It will also be interesting to see what other certifications the SEC may add in the future.


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About: Aryelle Young

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