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Why New Accredited Investors May Not Benefit From Their New Opportunities

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Why New Accredited Investors May Not Benefit From Their New Opportunities

The Securities and Exchange Commission is changing the official definition of an accredited investor. The change means more people will be able to invest in non-public assets like hedge funds, private equity, and startups. However, does that mean investors who previously weren't eligible to invest in them should start doing so? Perhaps not.

What Is An Accredited Investor?

Traditionally, the SEC defined an accredited investor as someone who either has $200,000 in annual income (or $300,000 for couples) or someone with a net worth of at least $1 million, excluding the value of their primary residence. Authorities have been talking about changing the definition for several years. The new definition expands this term to allow investors with certain professional certifications to qualify even if they don't meet one or both of the wealth measurements. 

The certifications that are included in the new accredited investor definition are Series 7, Series 63, and Series 82 licenses. The Series 7 license is the General Securities Representative, while the Series 63 license is the Uniform Securities Agent, and the Series 82 license is the Private Securities Offerings Representative. 

The SEC has considered allowing other professional licenses to enable someone to qualify as an accredited investor, and it might expand the definition further to allow additional certifications at some point. However, for now, selected professionals in the wealth management industry can qualify without meeting the asset or income requirements. 

Why New Accredited Investors Might Not Want To Take Advantage Of Their Status

Accredited investors can invest in private placement offerings, which are not registered with the SEC. These investments may come with higher rewards, but they are also higher risk. It's never a good idea to invest money you can't afford to lose, so these new accredited investors may not wish to invest in private placement offerings even though they are now legally able to do so. 

The point of the SEC opening higher risk private placement offerings only to accredited investors was to shield investors who can't afford to lose their nest egg because they don't have a high net worth or high income. Professionals who work in the field should understand that the offerings do come with more risk than those that are registered with the SEC, but that doesn't mean they will heed their own advice about taking on too much risk. 

New accredited investors might also want to avoid taking advantage of their status because private placements usually come with higher fees, which they probably can't afford. Further, such investments tend to come with lockup periods during which their money can't be accessed, and they usually have limited liquidity, which means the money can't be pulled out when it is needed. 

Some Funds Will Still Be Out Of Reach

In some cases, these new accredited investors still won't be able to invest in private placement offerings because some of them, like hedge funds and private equity funds, have high minimum required investments. These funds are designed with high-wealth individuals in mind, so they don't target professionals in the industry who don't fit that category. 

Of course, employees at such funds are now free to invest in their own funds, but their own funds might not even want their money if they are limited to 100 investors, as certain funds are. They want to make all 100 of those slots count, so they will be looking for investors who can afford to invest quite a bit of money instead of just small amounts.

Being an accredited investor comes not only with more opportunities but also more responsibilities. Just because you can do something, it doesn't mean that you should, and many new accredited investors will probably be asking themselves this same question about private placement investments.

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About the Author

Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.

 

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