On August 26, 2020, the Securities and Exchange Commission (the “Commission”) adopted amendments to update the definition of “accredited investor” in the Commission’s rules governing certain kinds of private securities offerings, including securities offerings to natural persons and entities conducted pursuant to Rules 506(b) and 506(c) of Regulation D under the United States Securities Act of 1933, as amended (the “Securities Act”), and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act.
The amendments to the accredited investor definition (i) add new categories of qualifying natural persons, including a category based on professional knowledge, experience or certifications and a category for knowledgable employees of private funds; (ii) add new categories of entities, including “family offices with at least $5 million in assets under management and a “catch-all” category for any entity which owns investments in excess of $5 million; and (ii) make certain other modifications to the existing definition. The amendments to the qualified institutional buyer definition similarly expand the list of eligible entities under that definition.
The current defintion of “accredited investor” had not been significantly updated for over three decades. The adopted amendments are meant to expand the number of persons eligible to participate in private offerings based on knowledge and sophistication versus the prior rules focus on income and net worth. Notably, the adopted amendments did not raise the standards for individual income ($200,000 for an individual, $300,000 for a married couple) or net worth ($1,000,000), which were established in 1982 and which many have argued should be updated for inflation.
The amendments will become effective 60 days following formal publication in the Federal Register, which means the rules will start to apply to new offerings in early November. You can read the full text of the Final Rule here.
Accredited Investor Definition
The amendments to the accredited investor definition in Rule 501(a) include:
Natural Person Categories
Expanded Entity Categories
The amendment to Rule 215, which is applicable to securities offerings made under Section 4(a)(5) of the Securities Act, replaces the existing definition with a cross reference to the definition in Rule 501(a). The Commission also adopted conforming amendments to Rule 163B under the Securities Act and to Rule 15g-1 under the Exchange Act.
Qualified Institutional Buyers
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.