On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to the definitions of “accredited investor” in Rule 501(a) under Regulation D and “qualified institutional buyer” in Rule 144A under the Securities Act of 1933 (the “Securities Act”). These amendments are intended to update and improve the existing definitions to identify investors with sufficient knowledge and expertise to participate in certain offerings exempt from registration under the Securities Act.
With respect to natural persons, the amendments to the accredited investor definition add a new category 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, as designated by the SEC from time to time. The SEC has thus far designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. The amendments also include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund, and added the term “spousal equivalent” to the definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The changes to Rule 501(a) also added certain entities to the definition of accredited investor. Thus, limited liability companies with at least $5 million in assets will now qualify as accredited investors, as will SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs). In addition, the amendments to Rule 501(a) add to the list of entities that may qualify as an accredited investor a new category for any entity that owns “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act of 1940 (the “Investment Company Act”), in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered. The amendments also now include “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 of 1940 (the “Advisers Act”).
The amendments to the qualified institutional buyer (QIB) definition in Rule 144A under the Securities Act add limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold already contained 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 a QIB, provided they satisfy the $100 million threshold.
The SEC stated in the Adopting Release that the amendments “are part of a broader effort to simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.” The SEC acknowledged the important role of the “accredited investor” definition in the exempt offering framework (including offerings by private companies, hedge funds, private equity funds, and venture capital funds) and recognized that wealth should not be the sole means for determining accredited investor status.
The new definitions were proposed in December 2019, but reflect significant industry input received by the SEC over a number of years. The SEC previously solicited comments on possible changes to the accredited investor definition in 2007. The SEC Staff published a report in December 2015 which examined the background and history of the accredited investor definition and recommended certain amendments to the definition and, subsequently, the SEC published a concept release addressing harmonization of the exempt offering framework in June 2019. The SEC’s Small Business Capital Formation Advisory Committee and the 2019 SEC Government-Business Forum on Small Business Capital Formation each provided recommendations regarding potential amendments to the accredited investor definition, and the SEC’s Investor Advisory Committee also adopted a recommendation regarding changes to the definition.
The SEC received more than 200 unique comment letters on the Proposing Release.
Amendments to the Accredited Investor Definition
Natural Persons Holding Professional Certifications and Designations or Other Credentials
As noted in the Adopting Release, the SEC believes “that certain professional certifications and designations or other credentials provide a reliable indication that an investor has a sufficient level of financial sophistication to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act.” Further, the SEC noted that “relying solely on financial thresholds as an indication of financial sophistication is suboptimal, including because it may unduly restrict access to investment opportunities for individuals whose knowledge and experience render them capable of evaluating the merits and risks of a prospective investment—and therefore fending for themselves—in a private offering, irrespective of their personal wealth.”
As proposed, the final amendment authorizes the SEC to designate by order individuals who are accredited investors because they hold qualifying professional certifications, designations, and other credentials. Such designation will be based upon consideration of all of the facts pertaining to a particular certification, designation, or credential, and the final amendments include a nonexclusive list of attributes that the SEC will consider in determining which professional certifications and designations or other credentials qualify a natural person for accredited investor status. These include, among others, the following:
- the certification, designation, or credential arises out of an examination or series of examinations administered by a self-regulatory organization or other industry body or is issued by an accredited educational institution;
- the examination or series of examinations is designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing;
- persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and
- an indication that an individual holds the certification or designation is either made publicly available by the relevant self-regulatory organization or other industry body or is otherwise independently verifiable.
The SEC noted that it will designate by order which professional certifications or designations or other credentials qualify an individual as an accredited investor, after notice and an opportunity for public comment. The professional certifications or designations or credentials currently recognized by the SEC as satisfying the above criteria will be posted on the SEC’s website.
Although the SEC adopted a requirement that such professional certifications or designations be held in good standing, it did not adopt a requirement that the individual must practice in the fields related to the certification, except to the extent that continued affiliation with a registered or professional firm is required to maintain the certification, designation, or credential.
Concurrent with the Adopting Release, the SEC published an order in which it designates the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative license (Series 65) as the initial certifications, designations, or credentials designated under Rule 501(a)(10). The SEC said that it may from time to time consider other certifications, designations, or credentials after it gains experience with the revised definition.
Knowledgeable Employees of Private Funds
The SEC adopted, as proposed, the addition of a category to the accredited investor definition that will enable “knowledgeable employees” of a private fund to qualify as accredited investors for investments in the fund. The new category is the same in scope as the definition of “knowledgeable employee” in Rule 3c-5(a)(4) under the Investment Company Act, which defines a “knowledgeable employee” with respect to a private fund as:
- an executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the private fund or an affiliated management person of the private fund; or
- an employee of the private fund or an affiliated management person of the private fund (other than an employee performing solely clerical, secretarial, or administrative functions with regard to such company or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such private fund, or certain investment companies related to the private fund and who has been performing such functions and duties for at least 12 months.
This new category of accredited investor is similar to that established by Rule 501(a)(4), which includes directors, executive officers, or general partners of an issuer (or directors, executive officers, or general partners of a general partner of the issuer). Rule 501(a)(4) will continue to apply to both non-fund and fund issuers.
The SEC acknowledged that the new category of knowledgeable employees in the definition of accredited investor may overlap with the existing category in Rule 501(a)(4). However, the SEC noted that the new category of knowledgeable employees does not limit accredited investor status to only those knowledgeable employees making investments in the private fund that they manage or co-manage. Additionally, under existing Rule 501(a)(8), private funds with assets of $5 million or less may qualify as accredited investors only if all of the fund’s equity owners are accredited investors. The SEC noted that “the inclusion of knowledgeable employees in the definition of ‘accredited investor’ will [allow such] employees to invest in the private fund without the fund itself losing accredited investor status when the fund has assets of $5 million or less.”
The new rules also attribute a knowledgeable employee’s accredited investor status to his or her spouse with respect to joint investments in private funds made by the knowledgeable employee and his or her spouse.
The SEC did not modify the definition of accredited investor to include “qualified purchasers” as defined in Section 2(a)(51)(A) of the Investment Company Act as some commenters had suggested, noting in the Adopting Release that “most qualified purchasers already meet the definition of accredited investor by virtue of the higher financial thresholds required to qualify as a qualified purchaser.”
Registered Investment Advisers and Exempt Reporting Advisers
The amendments include in Rule 501(a)(1) investment advisers registered under Section 203 of the Advisers Act and investment advisers registered under state laws. The SEC stated that it believes “that registered investment advisers . . . have the requisite financial sophistication needed to conduct meaningful investment analysis.” The SEC also determined that it is appropriate to include exempt reporting advisers in the definition of accredited investor on the grounds that exempt reporting advisers, as advisers to private funds, also have the requisite financial sophistication needed to conduct meaningful investment analysis.
Rural Business Investment Companies
As proposed, the SEC adopted amendments to include RBICs in Rule 501(a)(1), given the similarities between RBICs and small business investment companies.
Limited Liability Companies
The SEC amended the list of entities enumerated in Rule 501(c)(3) that have total assets in excess of $5 million and were not formed for the specific purpose of acquiring the securities being offered to include limited liability companies, recognizing that limited liability companies have been widely used since the rule was last amended. The SEC acknowledged the Staff’s long-standing interpretive position that limited liability companies that satisfy the other requirements of the definition qualify as accredited investors under Rule 501(a)(3).
The SEC did not amend Rule 501(a)(4) or Rule 501(f) to specifically include managers of limited liability companies, indicating in the Adopting Release that “managers of limited liability companies, through their knowledge and management of the issuer, are likely to be financially sophisticated and capable of fending for themselves in evaluating investments in the limited liability company’s securities.” The SEC also believes “that such a manager performs a policy making function for the issuer equivalent to that of an executive officer of a corporation under Rule 501(f).” The SEC determined that it was not necessary to distinguish between member managers and third-party managers.
Entities Meeting an Investments-Owned Test
The SEC adopted as proposed a new category of accredited investor that includes any entity with “investments,” as that term is defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that is not formed for the specific purpose of acquiring the securities being offered. The SEC indicated in the Adopting Release that “the intent of this new category is to capture all entity types not already included in the definition of accredited investor as well as those entity types that may be created in the future.” Among others, this includes Native American tribes and the divisions and instrumentalities thereof, federal, state, territorial, and local government bodies, and entities organized under the laws of foreign countries.
Certain Family Offices and Family Clients
The amended definition of accredited investor also includes family offices (as defined in the Investment Company Act) that meet the following additional requirements:
- at least $5 million in assets under management;
- not formed for the specific purpose of acquiring the securities offered; and
- a prospective investment is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of a prospective investment.
The amendment to the definition of accredited investor also includes “family clients” (as defined in the Investment Company Act) of such a family office if a proposed investment in the issuer is directed by such family office.
Under Rules 501(a)(5) and (6), as amended, spousal equivalents will be permitted to pool their financial resources for the purposes of determining accredited investor status. For these purposes a spousal equivalent is defined as a cohabitant occupying a relationship generally equivalent to that of a spouse, consistent with the approach that the SEC has taken in other rules.
For purposes of Rule 501(a)(5), as amended, “joint net worth” can be the aggregate net worth of an investor and his or her spouse or spousal equivalent. Moreover, the securities being purchased by an investor relying on the joint net worth test of Rule 501(a)(5) need not be purchased jointly.
Conforming Amendments to Rule 215
The SEC adopted an amendment to Rule 215 to conform that rule’s definition of accredited investor to the definition specified in Rule 501(a) of Regulation D. Rule 215 defines the term “accredited investor” under Section 2(a)(15) of the Securities Act for purposes of Section 4(a)(5) of the Securities Act. The accredited investor definition in Rule 215 has historically been substantially consistent, but not identical to, the accredited investor definition in Rule 501(a) of Regulation D.
Rule 163B under the Securities Act provides that an issuer may engage in test-the-waters communications with potential investors that are, or that the issuer or person authorized to act on its behalf reasonably believes are, QIBs, or institutions that are accredited investors. The SEC amended Rule 163B to include references to Rules 501(a)(9), (a)(12), and (a)(13), except that, with respect to (a)(13), only family clients that are institutions may be considered institutional accredited investors.
Exchange Act Rule 15g-1
Pursuant to Rule 15g-2 through Rule 15g-6 under the Securities Exchange Act of 1934 (the “Exchange Act”), broker-dealers are required to disclose certain specified information to their customers prior to effecting a transaction in a “penny stock.” Rule 15g-1 under the Exchange Act exempts certain transactions from these disclosure requirements. In particular, paragraph (b) of Rule 15g-1 exempts transactions in which the customer is an institutional accredited investor, as defined in Rule 501(a)(1), (2), (3), (7), or (8) of Regulation D. The SEC amended Rule 15g-1(b) to include a reference to Rules 501(a)(9), (a)(12), and (a)(13), except that, with respect to (a)(13), only family clients that are institutions may be considered institutional accredited investors.
Amendments to the Qualified Institutional Buyer Definition
Rule 144A(a)(1)(i) specifies the types of institutions that are eligible for QIB status if they meet the $100 million in securities owned and invested threshold. The SEC expanded the definition of a QIB by adding RBICs and limited liability companies, in order to be consistent with the revised definition of an accredited investor. Further, the SEC amended Rule 144A (to permit institutional accredited investors under Rule 501(a), of an entity type not already included in Rule 144A to qualify as QIBs when they satisfy the $100 million threshold. Consistent with current interpretations of Rule 144A, an entity seeking QIB status under Rule 144A(a)(1)(i)(J) may be formed for the purpose of acquiring the Rule 144A securities being offered.
The rule amendments will be effective 60 days following publication of the Adopting Release in the Federal Register. Issuers should begin updating offering documents, subscription materials, and procedures in anticipation of the final rules.
 Release No. 33-10824, Amending the “Accredited Investor” Definition (Aug. 26, 2020), available at https://www.sec.gov/rules/final/2020/33-10824.pdf (the “Adopting Release”).
 Release No. 33-10734, Amending the Accredited Investor Definition (Dec. 18, 2019), available at https://www.sec.gov/rules/proposed/2019/33-10734.pdf (the “Proposing Release”).
 The SEC observed in the Adopting Release that to qualify as an exempt reporting adviser under Section 203(m) or Section 203(l) of the Advisers Act, “an adviser would otherwise be required to register as an investment adviser with the Commission and thereby meet the minimum asset thresholds triggering such requirement.”
 A rural business investment company is defined in Section 384A of the Consolidated Farm and Rural Development Act as a company that is approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary. Rural business investment companies are intended to promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in such areas and are similar to small business investment companies.
 The other entities specified in Rule 501(c)(3) are: organizations described in Section 501(c)(3) of the Internal Revenue Code, corporations, Massachusetts or similar business trusts, and partnerships. The Staff’s position regarding limited liability companies under Rule 501(c)(3) was articulated in Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996), as well as in interpretation 255.05 of Securities Act Rules Compliance and Disclosure Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
 Rule 202(a)(11)(G)-1 under the Advisers Act. Rule 501(a)(12) directly references the definition of “family office” under the family office rule and the amendments apply only to family offices that meet this definition and do not apply to multi-family offices.
 Section 4(a)(5) of the Securities Act provides an exemption for issuers for the offer and sale of securities to accredited investors if: (i) the aggregate offering amount does not exceed $5 million; (ii) the issuer, or anyone acting on its behalf, does not engage in general solicitation or general advertising; and (iii) the issuer files a notice on Form D with the Commission.