SEC Modernizes Definition of Accredited Investor

The Securities and Exchange Commission (“SEC”) announced on August 26, 2020 that it was adopting amendments to the definition of "accredited investor." Participation in most private capital market deals generally requires, at a minimum, being an accredited investor. The SEC’s amendments broaden the definition of an accredited investor to allow greater participation in private capital market transactions for persons who have the knowledge and expertise to understand these deals, but otherwise would not have historically qualified as an accredited investor. The amendments allow investors to qualify as an accredited investor “based on defined measures of professional knowledge, experience or certifications in addition to existing tests for income and net worth.” The amendments also expand the types of entities that are defined as accredited investors. Because the vast majority of private capital market transactions take place under Rule 506(b) and Rule 506(c) of Regulation D, and those generally require investors to be accredited investors, this expansion should allow greater participation in most private capital market offerings.

As stated in the SEC press release, the amendments revise Rule 501(a), Rule 215 and Rule 144A of the Securities Act of 1933.

Rule 501(a)

The amendments to the accredited investor definition in Rule 501(a):
 

• add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65 and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
• include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
• clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs) to the list of entities that may qualify;
• add a new category for any entity, including 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;
• add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
• add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

Rule 215

The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).

Rule 144A

The amendments expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.

The SEC’s amendments will become effective 60 days from their publication in the Federal Register.

For more information, contact Erik Hansen, Matt Fornshell or another member of our Securities Litigation and Regulation Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.