Accredited investor laws are the bane of many in the crypto industry, who see them as preventing small investors from accessing big opportunities. When Celsius was recently forced to cut off access to U.S. citizens who were not accredited investors, many cried foul.
Did it help some users avoid the current crisis? Or do accredited investor laws go too far in saving users from themselves — and from profits, too?
As speculation about Celsius’ solvency began to mount, users started experiencing trouble withdrawing money from their accounts. Though Celsius CEO and founder Alex Mashinsky appeared to initially write the issues off as baseless rumors, the company soon announced a “temporary halt” on withdrawals. Users were — and, as of the time of writing, remain — unable to access their funds, which are, at least in theory, still earning interest.
Who Is an Accredited Investor?
Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D) provides the definition for an accredited investor. Simply put, the SEC defines an accredited investor through the confines of income and net worth in two ways:
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
- A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.
The last passage of the second bullet is critical because it is an important change that was introduced during the 2010 passage of the Dodd-Frank Act. Prior to the financial law’s passage, the primary residence was not excluded from determining a person’s net worth. Anyone who held accredited investments prior to the passage was exempted into the law.
SEC Amendments to the Accredited Investor Definition
On Aug. 26, 2020, the U.S. Securities and Exchange Commission (SEC) amended the definition of an accredited investor. According to the SEC’s press release, “the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.”
Among other categories, the SEC now defines accredited investors to include the following:
- Individuals who have certain professional certifications, designations, or credentials
- Individuals who are “knowledgeable employees” of a private fund
- SEC- and state-registered investment advisers5
Individuals holding Series 7, Series 65, and Series 82 licenses are now included as accredited investors. The SEC can add certifications and designations going forward to be included as well as encouraging the public to submit proposals for other certificates, designations, or credentials to be considered.
Employees who are considered “knowledgeable employees” of a private fund are now also considered to be accredited investors in regards to that fund.
The SEC has also broadened its definition to include many other entities, such as “Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that “own” investments as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.”
Other entities that may qualify include limited liability companies with $5 million in assets, SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies.
How to Determine if You’re Accredited?
Individuals who have earned $200,000 or more in income over the past two years automatically qualify as an accredited investor, as does a person whose income—when combined with a spouse’s—totals $300,000 or more.
An individual can also maintain a net worth of $1 million or more, minus the value of a primary residence.2 The only situation where the primary home can weigh on net worth is when an investor has either an underwater mortgage or a balance on a home equity line of credit.
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