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SEC Rulemaking Expands Accredited Investor Definition

On August 26, 2020, the Securities and Exchange Commission adopted amendments and issued a related order to expand the definition of “accredited investor” under Rule 501(a) of the Securities Act to include natural persons with certain professional certifications, designations; credentials issued by an accredited educational institution, including Series 7, Series 65, and Series 82 licenses; and other credentials which the Commission may designate from time to time by order.  In addition, the accredited investor definition was expanded with respect to investments in a private fund to include natural persons who are “knowledgeable employees” of the fund.  The Commission also added 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.

Aside from modifications to the natural persons that may qualify as accredited investors, the Commission also took action to expand the categories of entities that may now qualify as accredited investors by:

  • Clarifying that limited liability companies with $5 million in assets may be accredited investors;
  • Adding SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
  • Adding a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments” in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; and
  • Adding “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.

The SEC’s amendments also expanded 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 broadened the applicable definition for “qualified institutional buyer” to include any institutional investors included in the accredited investor definition that satisfies the $100 million threshold, even if such entity is not otherwise specifically listed within the definition of “qualified institutional buyer.”

The Commission noted that the amendments are part of its “ongoing effort to simplify, harmonize, and improve the exempt offering framework” and are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities and thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.

The amendments become effective 60 days after publication in the Federal Register.

Contact Bryan Pitko, Steve Quinlivan or Ashlee Germany for more information.