Navigating the future of accredited investing requires understanding the dynamic nature of SEC regulations on accredited investors. In January 2023, the SEC's Office of Information and Regulatory Affairs unveiled its 2022 Unified Agenda of Regulatory and Deregulatory Actions, a landmark announcement that provides insights into forthcoming regulatory activities, specifically related to private placement investment arrangements. The journey of rule amendments proposed by the SEC from public consultation to finalization underscores the active engagement the SEC encourages. The rules now at the "Final Rule Stage" point to imminent regulatory changes. So, let's delve deeper into this blog and understand what these developments could mean for us.
What is an Accredited Investor
An Accredited Investor is a person or a corporate organization who is entitled to make certain sorts of investments even if they are not registered with the SEC. Trusts, HNWI, brokers, insurance firms, and banks are all examples of accredited investors.
These investments are not registered and do not follow standard disclosure rules. So, they are regarded to be more risky.
Want to know accredited investor requirements and accredited investor qualifications
Past Changes Made to SEC’s Accredited Investor Rules & Regulations
- The Dodd-Frank Act of 2010 instructed the SEC to modify the computation of a natural person's net worth by eliminating the value of a person's principal residence.
- Besides the current tests for income or net worth, the SEC revised the accredited investor definition in 2020. It permitted investors to be approved as "accredited investors" according to stated indicators of expertise, knowledge, or licenses — such as holding FINRA or Financial Industry Regulatory Authority licenses.
SEC’s Accredited Investor Regulations Identified in 2023's Proposed Rule Stage
The following SEC’s accredited investor regulations were identified in 2023's Proposed Rule Stage:
- The SEC is anticipated to submit a rule proposing Regulation D revisions, particularly updates to the long-standing "accredited investor" definition, as well as Form D amendments to improve investor safeguards.
- The SEC is anticipated to adopt guidelines for investment advisors and registered broker-dealers involving the use of predictive data analytics, differentiated marketing, and behavioral cues.
- The SEC is expected to suggest stricter restrictions for registered investment advisers that outsource work to third parties to do due diligence on the service provider.
SEC’s Accredited Investor Regulations Identified in 2023's Proposed Rule Stage
The following SEC’s accredited investor regulations were identified in 2023's Final Rule Stage
A) Modifications for Registered Investment Advisers
The SEC is most certainly planning substantial modifications to transparency and conflict of interest reports. Many of the proposed standards may require extra quarterly financial statements to be disclosed to investors covering fees, costs, and performance concerns, as well as third-party yearly audits. These new regulations primarily relate to RIA or registered investment advisors. But, it is unclear if they will also apply to exempt reporting advisers until the final rule is published.
B) Modifications for Investment Advisors
The SEC will almost certainly amend its guidelines addressing forbidden activity and preferential treatment. These changes are likely to apply to all advisers, even those who are exempt from reporting and those who are barred from registering. This plan would very certainly prevent all private fund advisors from offering preferential conditions to specific clients for fund redemptions or giving preferential information about portfolio holdings. Furthermore, private fund advisers are forbidden from offering preferential conditions to select investors unless they are made public to all current and potential investors, which might be a substantial regulation change. The SEC's reasoning is likely to be concentrated on how these practices can be "contrary to the public interest," and such limitations could offer additional safeguards for all investors.
What are these prohibited activities?
- collecting certain fees and costs to a private fund or portfolio investment, like fees for unperformed services and fees linked with an inspection or inquiry of the adviser;
- Requesting compensation, indemnity, exclusion, or restriction of liability for specific conduct; and
- Lowering the amount of an adviser clawback by the value of particular taxes.
- Collecting fees or expenditures on a non-pro-rata approach.
- Receiving or borrowing credit from a private fund customer.
SEC’s Accredited Investor Agendas for Proposed Examinations
In addition, the SEC's Division of Examinations for accredited investors published its yearly examination priorities at the beginning of February.
The priorities are organized around "four pillars":
- encourage compliance,
- combat fraud,
- manage risk, and
- educate policy.
While the Division intends to continue its investigations within the present framework, there are a few noteworthy new areas of attention in 2023.
SEC’s New Focus Areas for Registered Investment Advisors
A number of the new focus areas are on Registered Investment Advisors to private funds, like hedge funds, private equity funds, and real estate-related funds, with a particular emphasis on:
- conflicts of interest,
- Expense and fee allocation and calculation,
- conformity with the new Marketing Rule, like performance advertising and paid testimonials and endorsements,
- policies about the use of alternative data, and
- Conformity with the Advisers Act Rule 206(4)-2, involving the timely release of audited financials.
- Furthermore, the Division will concentrate on RIAs to private funds with special risk characteristics. It will include private funds that hold difficult-to-value investments, like real estate-related investments, with a concentration on commercial real estate.
The SEC would regularly assess accredited investors’ new enforcements. They would also make improvements to accredited investing. It's uncertain how much of a future impact this is going to have on the market.
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- Accredited Investor Vs Qualified Purchaser.
- How to Evaluate Alternative Investments as an Accredited Investor.
- Accredited Investors and Retirement Planning.
Q1. Can a non-US person be an accredited investor?
A. The concept of an accredited investor does not include any need for residency or citizenship.
Q2. How much money do you need to be an accredited investor?
A. The SEC defines an accredited investor as someone who fulfills one of the three criteria listed below: Income. Has a yearly income of at least $200,000, or $300,000 when coupled with the income of a spouse. This amount of revenue should be maintained year after year.
Q3. What is the benefit of being an accredited investor?
A. Real estate crowdfunding investments, private placements, and other alternative investments are available to accredited investors that are not open to ordinary investors.
Q4. What happens if you invest and are not an accredited investor?
A. Being a non-accredited investor does not exclude an individual from investing; nonetheless, investment options differ from those available to accredited investors. Certain forms of bonds, real estate, shares, and other instruments are available to non-accredited investors.
Q5. What is higher than an accredited investor?
A. A qualified purchaser is higher than an accredited investor.