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How the Securities and Exchange Commission Defines Accredited Investors

While it is possible for anyone with a brokerage account to invest in publicly traded securities, an individual investor’s accreditation status determines whether they will have access to certain types of private investments, including some of those associated with impact investing.

Here is a look at how the Securities and Exchange Commission (SEC) defines “accredited investor” and what that means for those who want to explore their impact investing options.

What Is an Accredited Investor?

According to the SEC, to be considered “accredited” a person must either:

  • Have an income of at least $200,000 ($300,000 for married couples) for the past two years, and a projected income above that level for the current year

  • Have a net worth of more than $1 million, not including their home

Certain trusts with over $5 million in assets and entities where all equity owners meet the definition of accredited also qualify, as do certain other classes of particularly sophisticated persons. Institutional investors, such as mutual funds, private equity groups, and pension funds, typically qualify as accredited investors.

A related designation is “qualified investor.” According to the SEC, certain types of entities, including registered investment companies and banks, are considered qualified investors without needing to fulfill ownership and investment criteria. For natural persons, corporations, companies, or partnerships to be qualified investors, they must own and invest at least $25 million in investments on a discretionary basis. For governments and political subdivisions, the bar is $50 million.

Congress created the Securities and Exchange Commission during the Great Depression, after investors lost billions when the stock market crashed, to prevent the systemic risks that come with unregulated markets. The SEC uses investor accreditation and qualification to prevent less “sophisticated” investors—or those who could not withstand the financial loss—from putting their money into riskier, less transparent investments. Accredited and qualified investors can put their capital into investments that are not registered with the SEC (and which therefore face fewer reporting requirements), such as alternative investments like hedge funds or private equity.

The SEC uses investor accreditation to prevent less “sophisticated” investors from putting their money into riskier, less transparent investments.

Investor Accreditation and Impact Investing

Since impact investing is still entering the mainstream, many opportunities in the sector, from real assets to private debt, remain available only to accredited or even qualified investors. In a field where large institutional investors hold the majority (75%) of investments, many smaller investors who want to make an impact with their portfolios may not have enough options to choose from. The Global Impact Investing Network has characterized the lack of impact products for retail investors as “massive untapped potential” for the industry’s continued growth.

It is still possible for unaccredited investors to access impact investments by purchasing them indirectly through mutual or exchange-traded funds created by fund managers. In addition, a growing number of online platforms are attempting to meet the needs of those who want to support sustainable causes and socially responsible companies.

Potential New Rules

All that said, regulatory change may be on the way. In late 2019, the SEC put forward a proposal to update its investor accreditation rules in order to expand access to investments. While the existing income or net worth threshold would not change, “[t]he proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication,” SEC Chairman Jay Clayton said in the Commission’s press release.

The changes could bring more capital into impact investing opportunities currently available only to accredited and qualified investors, but some fear that smaller investors could find themselves taking on too much risk. “They aren’t closely connected or influential enough to gain access to information private issuers aren’t required to provide,” Barbara Roper of the Consumer Federation of America told Reuters. “They aren’t financially sophisticated enough to assess the risks and opportunities of private offerings absent that information. And they aren’t wealthy enough to withstand potential losses.”

Others are waiting before they make a judgment. “[I]t remains to be seen whether this change would expand in any meaningful way the universe of potential investors,” said Keith Higgins, chair of securities and governance practice at Ropes & Gray.

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