Will The Definition Of Accredited Investor Change In 2021
Theres been a lot of debate over the criteria of an Accredited Investor, as defined by the SEC and whether its set to change in 2021. Because the goal of these rules is to protect investors from riskier investments. However, critics continue to say that the current rules arent achieving these objectives. There has been an overwhelming consensus that the definition is flawed, but a number of differing opinions about how to fix it.
The different opinions include:
- The bar is too high or the bar is too low.
- The wealth-based test should be eliminated and replaced with a sophistication test.
- A sliding scale approach to investing in riskier offerings, allowing all investors to participate, but in increments proportional to wealth.
- A combination of these measures.
The SEC is required to review the definition of an accredited investor every four years. As such, the differing opinions will likely be debated by the SEC along with a sweeping review of all framework and rules for investing in alternative assets. The goal of this review will focus on what is an appropriate degree of protection and how to best accomplish it. Only time will tell if the definition of an accredited investor will change in 2021.
Accredited Vs Sophisticated Investors
Sophisticated investor requirements, according to the SEC must, have enough knowledge and experience in business matters to evaluate the risks and merits of an investment. Sophisticated and accredited investors are often considered interchangeable, however accredited is much more rigid.
The SEC ranks an accredited investor higher than a sophisticated investor. Although, the SEC also states that sophisticated persons can lead accredited investors in the case of a trust, bank, nonprofit or entity. The term sophisticated is considered more of a grey area than an accredited investor meeting set criteria.
Advantages And Disadvantages Of The Jobs Act
The primary advantage of the JOBS Act is that it removed regulatory hurdles for entrepreneurs, allowing them to access capital in a more efficient manner and more readily. The JOBS Act removed the solicitation ban, allowing entrepreneurs to market their businesses and utilize the Internet to reach thousands of potential investors without geographical limitations. The same benefit applies to investors as well. It allows investors to reach more potential investments without geographical restrictions.
The primary disadvantage comes from the advantage: less regulation. With less regulation and decreased requirements for disclosures, the potential for fraud is greatly increased for investors. This includes purposeful fraud as well as accidental fraud, which means less experienced business owners may inaccurately describe their business opportunities.
Easier access to potential investors
No geographical constraints for entrepreneurs and investors
Increased options for investors
More accessible and efficient means of accessing capital for entrepreneurs
Potential for fraud
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Understanding Securities Law Basics: For Startups And Private Investors
Before we get into the nuts and bolts of equity crowdfunding , lets talk about securities law compliance generally.
The Securities Act of 1933 requires companies who intend to sell securities to register those securities with the Securities and Exchange Commission unless an exemption from registration is available.
A security is a term that describes a tradable financial asset. Securities can take many forms with many different characteristics, including stocks, bonds, CDs, convertible notes, and SAFE notes . The test for what exactly constitutes a security is known as the Howey Test and is based on a case from the 1940s. For more on the Howey Test, read The Regulation of Cryptocurrencies and Initial Coin Offerings Under Traditional Securities Law. For now, just know that many more financial instruments than just stocks can be deemed securities.
Registering securities is time-consuming, complicated and costly . An initial public offering , which is the first time a security is made available for sale on the public market, is a grueling process for a business. Their books and records are poured over with tons of questions asked. The SEC wants to be sure the companies going public are transparent and disclose everything material to prospective investors.
What Is An Accredited Investor Vs A Non
Summary: In this article, youll learn the answer to the question what is an accredited vs non-accredited investor. Well explain how to become accredited, and the various investment opportunities for each. We will also identify types of investments, like crowdfunding and real estate syndications available to both accredited and non-accredited investors. And if the definition of an accredited investor will change in 2021.
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How Can A Non
Since 2016, non-accredited investors are allowed to participate in equity crowdfunding. Many start-up companies use equity crowdfunding as a part of their early-round funding. Through equity crowdfunding, general investors can invest in and earn equity shares from the companies in their early stages.
You Can Invest In Publicly
Some of the biggest include Apollo Global Management , The Blackstone Group , and KKR . These are each multi-billion dollar companies. And they have collectively over a trillion dollars of assets under management.
You are probably going to recognize some of these names.
As a shareholder of any of these companies, you get the benefit of their expertise in selecting the target companies for purchase or investment. And you don’t have to front massive amounts of money and have it tied up for many years.
That being said, these are still investments in individual stocks, so the lack of diversification can pose heightened volatility and risk.
But the clever folks on Wall Street have an answer. Enter the private equity ETF.
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Understanding The Jumpstart Our Business Startups Act
The JOBS Act is meant to make it easier for startups to raise capital. Secondarily, it is meant to allow retail investors to invest in startups. Proponents of the legislation contended that SEC rules were preventing startups from raising the capital they needed to expand. Opponents contended that SEC regulations exist to provide oversight and transparency which prevent people from defrauding investors.
The JOBS Act establishes the category of “emerging growth companies,” which the SEC defines as a company that is issuing stock with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. The JOBS Act lessens reporting and oversight requirements for these companies. Before the JOBS Act, in most cases, only accredited investors could invest in startups.
How To Become An Accredited Investor In Real Estate
The first way to become an accredited investor is to simply earn a higher income. The old saying goes, you have to have money to make money. While this is true in many cases, there are ways to build wealth outside of ordinary income, which well discuss below under, How to Qualify with Low Income.
Additional ways to qualify:
- If you are married, use joint income with your spouse to meet the accredited investor requirements.
- Use your net worth instead of income.
- If you are a director, executive officer or general partner of a company.
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Is Startup Investing Right For You Know Your Risk Profile
Investing in startups is not for the faint-hearted or the impatient. Startup investing is highly volatile, and financial returns can take many years and you can lose your entire investment. It is essential to understand your personal risk profile and resilience before deciding to invest in startups.
Investing in startups is also usually highly illiquid, even less liquid than real estate, and you are putting your hard-earned money into a very early and unproven venture. When it comes to science and technology startups, the timelines are long, and financial returns, if any, can come a long way down the line. If any of these things keep you up at night, angel investing may not be the right investment option for you.
Music And Performance Royalties
Royalty Exchange is an online auction platform for royalty rights . While specifics can vary considerably from auction to auction, youre investing in future income stream derived from royalty payments, primarily for music. For example, some auctions are for the performance rights associated with a catalog of songs such as radio, satellite radio, or streaming on Pandora. Read our Royalty Exchange review.
You Can Invest In Private Equity Etfs
What is a Private Equity ETF?
A private equity ETF is an exchange traded fund that offers exposure to private equity investments. The private equity ETF does this by tracking indexes that consist of publicly listed companies that invest in equity or debt of privately-held companies.
There are a handful of these types of ETFs available.
This site lists these ETFs and provides information about them. As with direct investing in a company like Blackstone or KKR, you should be able to invest in these ETFs through your brokerage account with a click of the mouse.
I would carefully read the prospectus on these funds before considering investing to make sure you are comfortable with the firms making up the index and the companies that these firms are investing in.
I would also take a good look at the expense ratios of these ETFs .
A bit of news circulated around in early 2020 about Vanguard getting into the private equity space. I love Vanguard for its low expense philosophy and was happy to hear this.
Unfortunately, it looks like the fund will only be open to institutional investors initially . Can’t wait to see what that looks like.
Related Reading: To learn more about private equity ETFs, check out this article.
What Else Is New
The SEC also removed the limit on the dollar amount that accredited investorsthose deemed experienced or wealthy enough for risky betscan contribute in crowdfunding campaigns, giving them a chance to take a bigger bite on any private offering
Non-accredited investors continue to face investment limits. But the new rules allow them to use a different calculation to determine what they can invest.
Individual investors with an annual income or net worth less than $107,000 can contribute either $2,200 or 5% of their annual income or net worth, whichever is greater. The old rules limited them to the lesser of those two numbers.
Investors with annual incomes or net worth greater than $107,000 can contribute up to 10% of the highest number.
Additionally, the updated rules let companies test the waters, or generally solicit potential investor interest, in an offering before actually undertaking one.
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How Securities Laws Operate In The United States
As a general rule, Section 5 of the United States Securities Act of 1933 requires that any offer or sale of securities must be registered with the Securities and Exchange Commission . The SEC registration process is complex, time-consuming, and costly, involving lengthy financial and risk disclosures and filings, such that no early-stage company could reasonably afford to comply with the registration requirements.
Section 4 of the Securities Act provides the most-commonly utilized exemption from Section 5. It exempts from SEC registration any transactions by an issuer not involving any public offering. At first, this might seem like any private offering is permissible. However, the Securities Act itself provides little clarity regarding the scope of public offerings and what constitutes a permissible private offering. As such, any company that tries to comply with 4 exposes itself to risks that the SEC will categorize an offering as public and therefore subject to the registration requirements of Section 5. Failure to comply with these requirements can result in both civil and criminal penalties. Understandably, there have been numerous legal disputes about the categorization of securities offerings under 4.
To resolve these disputes, courts have created a set of factors that influence whether or not an offering is deemed private. The factors are flexible, and no single factor is determinative.
History Of Regulation Crowdfunding
If you want to invest in startups without being accredited, you can explore Regulation Crowdfunding offerings. The Jumpstart Our Business Startups Act of 2012 allowed more individuals the opportunity to invest in certain early-stage capital raises. Reg CF offerings are those operating under an exemption from the registration requirements to offer and sell securities up to $1.07 million without having to register the offering with the SEC.
If youre not an accredited investor, Reg CF investment opportunities are your chance to invest in early-stage startups.
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Opportunities For Accredited Investors
As mentioned previously, accredited investors have access to investments that are higher risk and higher reward. There are several different types of investments for those that qualify as accredited. There are also plenty of opportunities available if you are not accredited. Your interests, goals and expertise will help determine which investments are best for you.
The are investment opportunities for accredited investors:
- Real Estate Syndications
- Venture Capital & Private Equity Funds
- Hedge Funds
- Specialty Investment Fund
Regulation A+: Good News For Non
By Kevin Vela
Recently released Regulation A+ rules are creating excitement for early-stage ventures that didnt previously have access to VC capital and for the millions of Americans who can now invest in innovative private companies. The new rules, mandated by Title IV of the Jumpstart Our Business Startups Act, update and expand Reg A, an existing exemption from registration for smaller issuers of securities. The Reg A+ mini-IPO enables small and medium-sized companies to offer and sell up to $50 million of securities in a 12-month period without going through the full SEC registration process, and in some cases avoiding the state registration process.
Why choose a Reg A+ offering?
Reg A+ provides several benefits to the issuer and the shareholders subject to certain restrictions:
- The ability to raise large amounts of capital
- The ability to offer and sell unrestricted shares to accredited AND non-accredited investors
- Founders and other insiders are able to sell some of their shares
- The offering can begin to develop a trading market for shareholders to gain liquidity
How does an A+ offering work?
Is my Company Eligible?
Im in, now what?
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Do I Have To Prove Accredited Investor
Do You Have to Prove You Are an Accredited Investor? The burden of proving that you are an accredited investor does not fall directly on you but rather the investment vehicle you would like to invest in. An investment vehicle, such as a fund, would have to determine that you qualify as an accredited investor.
What Is The Jumpstart Our Business Startups Act
The Jumpstart Our Business Startups Act is a piece of U.S. legislation that was signed into law by President Barack Obama on April 5, 2012, that loosens regulations instituted by the Securities And Exchange Commission on small businesses. It lowers reporting and disclosure requirements for companies with less than $1 billion in revenue and allows the advertising of securities offerings. It also allows greater access to crowdfunding and greatly expands the number of companies that can offer stock without going through SEC registration.
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Why Should I Care About Accredited Investors
Public registration of securities isnât feasible for most early-stage companies. So startups choose exemptions that allow them to issue shares without registering.
Every state has different exemption rules, but the SEC lets you override them all by meeting SEC requirements and making a Regulation D Rule 506 offering. By taking advantage of this exception, your company can issue stock to accredited investors without a registration of public securities.
That being said, under Rule 506, you can issue shares to non accredited investorsâup to 35 of themâbut only if you meet certain disclosure requirements. Those requirements are so arduous that, for most startups, the cost of meeting them isnât worth it.
So, if your startup is just getting off the ground, youâll likely rely on accredited investors to raise the capital you need.
What Is An Accredited Investor
According to the SEC, an accredited investor is an entity âsophisticatedâ enough to make potentially high-risk investment choicesâsuch as investing in a company still in its earliest stages of fundraising.
âSophisticatedâ in this case translates to âwealthy.â An accredited investor must achieve certain minimums in terms of net worth and regular income.
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How To Decide Where To Invest Choose An Industry Sector
Startups operate in a wide range of industry sectors. Choosing a sector with the appropriate balance between risk and reward is an important consideration that goes beyond the scope of this simple guide but is a vital part of your due diligence. Startups leveraging advances in science and technology across sectors present an opportunity for investors because of the potential for growth, the inherent value of their typically significant intellectual property and their potential to have an impact beyond just monetary returns.
Psst You Dont Need To Be An Accredited Investor
Co-Founder, Nth Round
Good news! The SEC is offering more and more ways for non-accredited investors to participate in high-altitude investing. After all, the accredited investor paradigm is old, stodgy, and just plain arbitrary. Itâs basically a short-cut for the SEC to use as a crutch. It says, âHey, if youâre worth a ton of money, you should know better, so weâre not going to protect you.â Thatâs neat and clean for them. Itâs also unfair for us.
As SEC Commissioner Hester Peirce says, âWait a minute, youâre telling me I have to be rich in order to get rich?â That makes no sense.
The reality is that non-accredited investors already can participate in many ârestrictedâ investment opportunities. Certainly, companies can invite almost anyone to invest, no question. Hereâs how.
The SEC has several offering rules that allow non-accredited investor participation. Perhaps the simplest, and most commonly used, is the Reg D Rule 506 private offering. Here, issuers can allow up to 35 âsophisticated investors.â Thatâs you and me! We just need to have a relationship with the company , and have âsufficient knowledge and experience in financial and business mattersâ to be capable of evaluating the investment. We donât have to be rich, or make a zillion dollars. That said, we should be cautious, and assume that we can lose our entire investment. Private investing is not for the faint of heart!
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