David here.

In a historic move last week, the SEC updated the definition of “accredited investor” for the private equity markets. The change goes into effect on October 25th, 2020.

This overhaul was the product of years of hard work and regulatory red tape for the organization. It’s the first major change to the definition since the Securities Act of 1933.

Up until now, to be an accredited investor, you’d need to have an annual income exceeding $200K (or $300K for joint income) for the last two consecutive years, or have a net worth of at least $1 million.

That’s a pretty high bar to meet – and it’s excluded plenty of highly qualified individuals from investing in high-capital raises. The fact is, you don’t need to be a millionaire to be an expert angel investor. If you know your stuff, you know your stuff.

Luckily, this year’s amendments go a long way to acknowledge that – opening doors for many more angel investors to get into later-stage and higher-capital deals.

The new language states that investors can qualify as accredited if they have “financial sophistication and understanding of the private markets.”

This includes employees of private investment funds; LLCs and family offices managing more than $5 million; and spousal equivalents (so that spouses can pool their funds together).

Why You Should Care about Accreditation Rules

The accredited investor framework was created to limit the number of investors who can participate in more “sophisticated” opportunities – oil and gas, venture and private equity funds, and later-stage startups, to name a few.

One the one hand, these rules protect less experienced investors from unscrupulous CEOs and fund managers. On the other hand, they also limit 92% of U.S. households from participating in the most lucrative investment opportunities.

Barring people from opportunity is exactly the kind limitation that directly contributes to the wealth gap between the “haves” and the “have nots.”

What the Rule Change Means for You

These regulatory changes will have both long- and short-term impacts. In the short term, we’ll see the pool of accredited investors grow substantially. We’ll also get to experience a fairer system of determining financial sophistication – degrees and certifications vs. income and net worth.

According to Andy Gordan of Serial Entrepreneur and EarlyInvesting.com, there are roughly 10 million households of accredited investors in the United States (or about 8%).

He estimates that the impending changes will add 691,000 people to the ranks of the accredited (a 6.91% increase), in addition to other proposed amendments that will allow many more people to invest in the private markets.

What many have missed in the SEC updated definition is the path to accreditation by way of certification, which opens the door to any self-motivated individuals who wish to study in order to become an accredited investor. This will lead to a significant number of hardworking (and oftentimes young) investors who will make great additions to the accredited investing community.

When these changes take effect next month, more of our own members will be able to access the best opportunities out there. Meanwhile, the SEC is working on some other proposals that will change the game forever, including raising the maximum amount a startup can raise via crowdfunding to $5 million (if you’re an A&E member, you can learn more about that by checking out the latest State of Angel Investing report – otherwise, we’ll cover it here soon too).

In other words, this is the best moment in history to become an angel investor… and as 2020 progresses, conditions will only get better.

At the Angels & Entrepreneurs Network, we make getting started easy by selecting and analyzing hundreds of deal opportunities each and every month. Many of the recommendations made by the research team are companies I’ve invested my own money into – that’s how much I believe in their success.

Just click here to learn more about the Network. I’ll be back soon.

Very best,

David Weisburd