June 24, 2022

Understanding “Accredited Investor” Status and Origins

The U.S. Securities and Exchange Commission’s responsibilities include, but are not limited to, promoting capital formation while maintaining appropriate protections for investors. As private markets are exempt from rigorous disclosures required for funds registered with the SEC, individuals have historically been unable to access alternative investments unless they met wealth thresholds to qualify as accredited investors. The definition of an accredited investor has recently been updated, and Poolit seeks to democratize access to alternative investment strategies even further by providing exposure through low-cost registered funds.

Registered Funds vs. Accredited Investors

In the aftermath of the 1929 stock market crash, the Securities Act of 1933 was enacted to require complete and accurate disclosure of information necessary to make an investment decision. However, private offerings were exempt from the registration requirement’s information disclosures. As a result, unregistered securities — such as private equity funds, venture funds, or hedge funds — were only accessible to accredited investors having sufficient knowledge and expertise. These offerings were limited to ensure that participating investors were able to decide to invest for themselves or sustain losses, rendering the protections of a registered offering unnecessary.

Individuals qualified as accredited investors under the Securities Act’s definition use wealth as a proxy for financial sophistication based on certain levels of net worth or income. The wealth thresholds were measured by either a net worth of over one million dollars excluding a primary residence’s equity or two years of income exceeding two hundred thousand dollars. However, even among accredited investors, the disparity of access to these unregistered securities, investing in areas of the economy that disproportionately create new jobs, foster innovation, and provide growth opportunities, has increased due to the excessive costs and minimums the industry has gravitated towards to reduce the administrative burden of servicing investors.

In 2019, registered offerings accounted for $1.2 trillion (30.8%) of new capital, compared to approximately $2.7 trillion (69.2%) that the SEC estimated was raised through unregistered offerings. Of this, the estimated amount of capital reported as being raised in offerings accessible to accredited investors was approximately $1.56 trillion. [https://www.sec.gov/rules/final/2020/33-10824.pdf]

Expanding Investment Opportunities

In 2020, the SEC finalized a rule to expand investment opportunities while maintaining investor protections by amending the definition of an accredited investor. For the first time, individuals are permitted to participate in private capital markets based on alternative measures of financial sophistication, not only based on their income or net worth. Specifically, the amendments add a new category for individuals to qualify as accredited investors based on certain professional or educational certifications, designations or credentials. The SEC initially designated securities industry representatives holding the Series 7, Series 65, and Series 82 licenses, which relate to competency regarding securities generally, state law and private offerings, respectively.

In addition to facilitating capital formation by expanding the pool of investors and increasing the liquidity of unregistered offerings, newly eligible accredited investors benefit from being able to participate in the high-growth stages of issuers who tend to stay private for longer than in the past. However, retail investors are left with less access to the broad spectrum of investment markets as a whole, missing out on the opportunity for excess or uncorrelated returns. Attempts to expand retail investor access to private markets while mitigating risks include having experienced institutional alternative investment firms manage regulated funds, such as mutual funds, exchange-traded funds (ETFs), or real estate investment trusts (REITs). Currently, the SEC requires registered closed-end funds that invest more than 15% of their assets in private funds to be limited to accredited investors.

Poolit Provides Access to Alternative Strategies to Accredited Investors

We are convinced that everyone should have the opportunity to generate meaningful wealth, so we left Wall Street to rebuild it for you. Poolit is seeking to capitalize on changing regulations to offer individuals the opportunity to invest in the same potential risk-adjusted returns offered by alternative strategies previously accessible only by institutions and high net worth investors. Partnering with professional alternative investment managers through a registered fund, Poolit’s offering will provide broad exposure to private market strategies in a single low-cost investment. To further democratize alternatives, the fund will also have no minimum investment. Poolit is expanding alternative investment access to all accredited investors and has the long-term goal of working with regulators to make alternatives available to all investors regardless of net worth.

To begin building your wealth and realizing your potential, get early access and be the first to know about new alternative investments on Poolit by providing your email at https://www.thepoolit.com.