SEC Proposes to Amend Definition of Accredited Investor: Are You Qualified to Invest in Alternative Investments? | Schwab - Millennium Trust Company

SEC Proposes to Amend Definition of Accredited Investor: Are You Qualified to Invest in Alternative Investments?

March 5, 2020
By Millennium Trust
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Historically, investors have managed risk and return by diversifying their portfolios across asset classes – but it’s not as easy as it once was. During the past two decades, the number of companies trading on U.S. stock exchanges has fallen by one-half, and the number of companies available through European exchanges has fallen, too.  

As the number of publicly traded companies declined, financial advisors and investors began to explore opportunities in alternative investments. Alternative assets include:

  • Private equity/debt

  • Marketplace lending

  • Real estate

  • Hedge funds

  • Commodities

  • Precious metals

These investments don’t fit into conventional asset class categories such as stocks, bonds and cash. Because alternative assets tend to behave differently from traditional asset classes, adding them to a portfolio of traditional investments may improve diversification, lower risk and enhance returns. Alternatives also may offer significant tax benefits.

One way in which alternative assets differ from publicly traded assets is that alternatives, usually, are not priced on a daily basis. This means investors experience less price volatility than the stock market, which can be reassuring. It also often means that alternatives cannot be liquidated as quickly as publicly traded assets.

Soon, more investors may be able to own alternative assets.

Until recently, the Security and Exchange Commission (SEC) defined accredited investors by net worth rather than by knowledge of investing. As a result, experienced investors who wished to participate in alternative assets but did not have a high enough net worth or income level could not invest. That may change soon.

In December 2019, the SEC proposed amendments to the current definition of accredited investor. The changes would expand the definition to include:

  • Individuals with professional certifications and designations, such as a Series 7, 65 or 82 license

  • Certain professional credentials issued by accredited educational institutions

  • “Knowledgeable employees” of private funds

  • Limited liability companies that meet certain conditions

  • Registered Investment Advisers (RIAs)

  • Rural Business Investment Companies

  • Any entity (not formed for the specific purpose of investing in the securities offered), including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million

  • Family offices with at least $5 million in assets under management and their “family clients” as defined under the Investment Advisers Act

In addition, the SEC added spousal equivalents to the definition of accredited investor. Spousal equivalents are people who are treated as spouses, so their financial resources may be considered together for the net worth and income tests.  

Self-directed IRAs offer advantages to alternative asset investors.

Alternative assets sometimes have tax advantages, and holding the assets in self-directed IRAs may provide additional tax benefits.

Self-directed IRAs are like other IRAs. You can open a traditional or Roth self-directed IRA. The primary advantage is that self-directed IRAs give owners the opportunity to hold alternative investments. Self-directed IRAs give owners:

  • Full control over their accounts

  • Opportunities to participate in new market sectors

  • Tax-deferred growth in traditional IRAs

  • Tax-free growth in Roth IRAs

  • Potential to qualify for annual tax deductions

Self-directed IRAs are not for everyone. However, if your goal is to diversify your portfolio by owning alternative assets, and you prefer to hold them in a tax-advantaged qualified retirement account, then a self-directed IRA may be a good choice.

Before taking any action, talk with your financial adviser about the opportunities, rules and limitations of self-directed IRAs. You should also research self-directed IRA custodians, like Millennium Trust.

To learn more about investing in alternative assets, visit the Millennium Alternative Investment Network® (MAIN®).

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice. Millennium Trust does not undertake any due diligence for you, including the Platforms listed on MAIN, their prospective investments or any other investment you may select. The inclusion of any Platform on MAIN in no way represents an endorsement or recommendation of the Platform or its investment options. The Platforms and investment options on MAIN are not a complete list of investment providers or investments that you may choose to hold in your Millennium Trust self-directed IRA, and are provided for informational purposes only.

Millennium Trust Company, Millennium Alternative Investment Network, and MAIN are registered trademarks of Millennium Trust Company, LLC in the United States. Copyright © 2020 Millennium Trust Company. All rights reserved.

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