In August 2020, the SEC adopted amendments to the definition of “accredited investor” that will expand participation in certain securities offerings including those conducted under Rules 506(b) and 506(c) of Regulation D, Regulation Crowdfunding, and Regulation A. These amendments, which became effective this week, may significantly increase eligibility for individuals and entities that wish to invest in emerging companies.
In this post, we will explore one important aspect of the SEC’s recent rule changes regarding accredited investors: individuals deemed accredited investors through their certifications, designations, and/or credentials or their job-specific knowledge.
Historically, accredited investor status for individuals has been determined solely through income or net worth metrics established by the SEC or by an individual’s role as a director, executive officer, or general partner of the company issuing securities. But, as the SEC has acknowledged, financial thresholds are an imperfect proxy for financial sophistication and the ability to fend for oneself in an investment.
The amended rules now offer an additional path for outsider investors: an individual—regardless of his or her financial status—is deemed to be an accredited investor if he or she holds, in good standing, a professional certification or credential designated by the SEC as meeting specified requirements. In connection with the amendments, the SEC determined that Series 7, Series 65, and Series 82 licenses issued by FINRA qualify as sufficient. Adopting an incremental approach, the SEC also established a process whereby it may designate other certifications or credentials in the future.
Similarly, the amended rules deem certain individuals associated with private funds such as qualifying hedge funds, venture capital funds, or private equity funds—referred to as “knowledgeable employees” in the Investment Company Act of 1940—to be accredited investors for investments in their funds. Knowledgeable employees include officers and directors of the fund as well as certain employees who have been engaged in investing activities at the fund for at least a year. In addition to expanding investment opportunities for these individuals, this amendment also prevents a smaller private fund from losing its own status as an accredited investor because of sales to insiders who otherwise do not qualify as accredited investors.
