On August 26, 2020, the Securities and Exchange Commission adopted amendments to change the definition of “accredited investor.” The amendments expand the list of entities that qualify as accredited investors. Most notably, the net worth and income tests ($1 million in net worth or an annual income of $200,000 for the past two consecutive years) are no longer a barrier to individuals with financial sophistication, as certain professional certifications, credentials, and work for an investment fund can permit natural persons to qualify as accredited investors. Also significantly, for natural persons wanting to qualify under the income or net worth tests, “spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.”

Why is the definition of accredited investor important? Up until this point, participation in hedge funds, private equity investments, and other less-regulated investment opportunities was restricted to accredited investors because it was believed that the typical investor lacked the sophistication to make informed decisions. The hole in the logic is obvious—an investor without a large amount of assets may be financially savvy, while a millionaire may lack good financial judgment. Put simply, wealth is an imperfect proxy for sophistication of an investor. 

What will this change? The new definition will expand the potential pool of investors to include those with certain financial certifications and will make it slightly easier for individuals to qualify based on net worth or income. While these are marginal changes, the importance of the amendments is not based on their effect but on their implications. Changing the definition of “accredited investor” signals a willingness of the SEC to consider opening up the opportunity for investment in private companies to a wider range of individuals. Loosing restrictions could allow alternative forms of investment, such as Initial Coin Offerings (ICOs), to prosper. If this trend continues, we could be in for a new financial revolution.