On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to its “accredited investor” definition. Its goal was to simplify and improve the framework to allow investors who have been denied eligibility in the past to qualify based on their knowledge, expertise, or certification, in addition to certain tests for specific income and net worth. It also expanded the list of entities that might qualify as an “accredited investor.”
The SEC made these amendments in an effort to expand investment opportunities while maintaining appropriate investor protections and promoting capital formation.
The following are the highlights of the amendments that will revise Rule 501(a) and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
- Add a new category to the definition 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 which the SEC may designate from time to time by order. In conjunction with the adoption of the amendments, the SEC designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the SEC with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the SEC’s consideration additional certifications, designations, or credentials that satisfy the attributes set out in the new rule;
- Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
- Clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
- Add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “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 “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; and
- Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
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.
The amendments to these rules will give options and opportunities to both investors and investment managers who were limited in the past by who they could invest with and who would be allowed to invest.
The amendments and order become effective 60 days after publication in the Federal Register.
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