The SEC is putting a major “modernization”, as they describe it, in place to update the definition and what qualifies and individual or institution that meets the standards of an Accredited Investor.
Quickly for anyone who isn’t familiar with what an Accredited Investor is, an accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. Venture investing in startups is a prime example in which the startups are not required to publicly disclose financial reports like a company that is publicly traded on a stock exchange.
The new definition is set to take effect Dec 8th, 2020 and we wanted to share a snippet from the SEC documentation describing the rule change;
“However, as stated in the Proposing Release, we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways. These include the ability to assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss. Accordingly, the final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity.”
You can read the full release here. This change has major implications for investing world and particularly the venture startup investing scene in which only financially wealthy individuals and institutions could participate in these investments as well as run venture capital funds, lead syndicates, and angel invest. Under the new rule, demonstrating an ability to asses these investment opportunities and having an understanding of the risk and reward of these investment opportunities.
The largest impact I see this having is in opening up the ability for knowledgeable and experienced startup founders and employees who have had experience and success but might not financially qualify as an accredited investor. They have access to a network of other founders and startups that could be candidates for venture and if they are able to asses their viability and organize a syndicate or even further, organize LPs into a micro-fund or rolling fund, they could help be a conduit for investment opportunities into these early-stage companies.
It will be interesting to see how this rule change plays out and what affect it has on the ecosystem.