SEC Expands Accredited Investor Definition to Increase Participation in Private Offerings

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On August 26, 2020, the Securities and Exchange Commission (SEC) adopted new final rules intended to modernize the existing rules, and provide additional flexibility for certain entities and individuals the SEC deems financially sophisticated enough to understand the risks of participating in private offerings.

These additions to the definition of accredited investor, particularly those changes regarding professional certifications, designations, or credentials and to qualifying family offices, are positive changes that will expand investment opportunities for certain entities and sophisticated individuals who previously did not qualify as accredited investors, and increase the private fundraising capabilities of corporations.

The accredited investor definition in Rule 215 and Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended, has been amended to make the following additions:

  • Individuals Holding Professional Certifications: Individuals holding certain professional certifications, designations or other credentials issued by an accredited educational institution, as designated by the SEC from time to time, may qualify as accredited investors. When the new final rules take effect, holders in good standing of FINRA Series 7, Series 65, and Series 82 licenses will now qualify, and the SEC retained discretion to add additional professional certifications, designations, and credentials at a later date.
  • Knowledgeable Employees: Individuals who are “knowledgeable employees” of a private fund may now qualify as accredited investors for the purposes only of investing in that fund. This list of “knowledgeable employees” includes, among others: (i) executive officers, directors, trustees, general partners, advisory board members, and others who oversee the fund’s investments, and (ii) employees or affiliated persons of the fund that have regularly participated in the fund’s investment activities over the past year.
  • Certain Investment Advisers & Rural Business Investment Companies: SEC- and state-registered investment advisers, exempt reporting investment advisers, and rural business investment companies (RBICs) that are so licensed by the United States Department of Agriculture may qualify as accredited investors.
  • Entities With $5 Million or More in Investments: Any entity, including Indian tribes, governmental bodies, funds, and those organized under the laws of foreign countries, that owns investments in excess of $5 million may qualify as an accredited investor.
  • Family Offices and Family Clients: Family offices (i.e., entities established by families to manage the family’s wealth and provide other services to family members, such as tax and estate planning services) with at least $5 million in assets under management and their family clients may qualify as accredited investors if they are not specifically formed for the purpose of acquiring the securities offered, and are directed by a person capable of evaluating the merits and risks of the prospective investment.
  • Limited Liability Companies: The new definition clarifies that limited liability companies with $5 million in assets may qualify as accredited investors.
  • Spousal Equivalents: The term “spousal equivalent” has been added to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors just as spouses may do under the old rules.

Notably, the SEC did not revisit the accredited investor financial criteria for natural persons, which remain largely unchanged since 1982 despite not having been indexed for inflation.

These amendments were announced on August 26, 2020, and will become effective 60 days after publication in the Federal Register.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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