WHAT TO DO NOW
As noted above, the amendments will become effective 60 days after publication in the Federal Register. Before effectiveness, private market participants should review and revise any documents that refer to the definitions of accredited investor or QIB, such as subscription agreements and investor questionnaires.
ACCREDITED INVESTOR DEFINITION
“Accredited investor” is defined in Rule 501(a) of Regulation D. The definition identifies investors who, because of their financial sophistication and ability to sustain the risk of investment losses, do not need the protections of the registration process for public offerings under the Securities Act of 1933. Importantly, accredited investors can invest in private offerings under Rules 506(b) and 506(c), which have become a very significant capital market, especially for start-up companies. The amendments do not change the current $200,000 individual income and $1 million net worth thresholds established by the SEC in 1982 or the $300,000 joint income threshold established in 1988, and the amendments do not index these thresholds to reflect inflation.
The amendments make the following changes and updates to the definition of accredited investor:
- permit natural persons to qualify as accredited investors based on professional certifications, designations or credentials approved by the SEC, which currently include Series 7, 65 or 82 FINRA licenses;
- permit natural persons who qualify as a “knowledgeable employee” of a private fund to invest in the fund;
- expand the current list of entities that may qualify as accredited investors to include limited liability companies (LLCs) that meet certain conditions, registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs);
- add a new category for any other form of entity not already included within the definition of accredited investor that owns “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 a new category for certain “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;
- clarify that, for purposes of Rule 501(a)(8), it is permissible to look through various forms of equity ownership to natural persons when determining accredited investor status; and
- add the term “spousal equivalent” to the accredited investor definition and related note, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
QUALIFIED INSTITUTIONAL BUYER DEFINITION
The amendments make the following changes to the definition of QIB under Rule 144A:
- add LLCs and RBICs to the types of entities that are eligible for QIB status if they meet the $100 million in securities owned and investment threshold in the Rule 144A definition; and
- add a “catch-all” category that will permit entities that are “institutional accredited investors” (as defined in Rule 501(a)) but are not one of the categories of entities currently included in the definition of QIB to qualify as QIBs if they satisfy the $100 million threshold.
CHANGES FROM THE PROPOSED AMENDMENTS
The amendments include the following changes from the proposed amendments, which were summarized in an earlier Goodwin client alert:
- add a note clarifying that institutional accredited investors seeking QIB status under new subsection (a)(1)(i)(J) of Rule 144A may be formed for the purpose of acquiring the securities being offered;
- add exempt reporting advisers to the list of accredited investors in subsection (a)(1) of Rule 501;
- add a note to new subsection (a)(10) of Rule 501 that clarifies the process by which the SEC will designate professional certifications, designations or credentials that will qualify natural persons as accredited investors under subsection (a)(10);
- modify new subsection (a)(13) of Rule 501 to limit accredited investor status to any family client whose investment is directed by its family office.