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Regulatory Alert: SEC Expands Definition of Accredited Investor

On August 26, 2020, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to the definition of “accredited investor” under the Securities Act of 1933. As previously covered, the amendments expand the definition of an accredited investor in an effort to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets. Notably, the updated definition of an accredited investor will allow more investors to participate in hedge funds and other alternative investment funds by adding new categories of qualifying natural persons and entities. The amendments became effective on December 8, 2020 and can be viewed here.

Below is a summary of key changes to the definition of an accredited investor included in the amendments:

  1. Credentialed Individuals. Individuals may now qualify as accredited investors based on certain professional certifications, designations or credentials. Initially, the SEC designated the Series 7, Series 65 and Series 82 licenses as qualifying credentials. The SEC may add other qualifying credentials pursuant to future orders.
  2. Knowledgeable Employees. “Knowledgeable employees”, as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940 (“Company Act”), of private investment funds will be deemed accredited investors when making investments in such funds. Notably, expanding the definition of an accredited investor to include knowledgeable employees will allow funds with assets of $5 million or less to permit such employees to invest in the funds without jeopardizing the fund’s status as an accredited investor (i.e., an entity in which all equity owners are accredited investors).
  3. Additional Entities. An accredited investor now includes SEC- and state-registered investment advisers, exempt reporting advisers, rural business investment companies and limited liability companies with more than $5 million in assets. The new definition also adds a category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that (i) own “investments,” as defined in Rule 2a51-1(b) under the Company Act, in excess of $5 million; and (ii) that was not formed for the specific purpose of investing in the securities offered.
  4. Family Offices. 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 of 1940, will now qualify as accredited investors.
  5. Spousal Equivalents. Spousal equivalents may now pool their finances for the purpose of qualifying as accredited investors. The SEC specifically noted that spousal assets do not need to be held jointly to be included in the pooled finances calculation.

Private investment funds and other issuers that currently rely on Regulation D of the Securities Act to offer securities to investors should work with legal counsel to amend their subscription documents and offering materials to reflect the updated definition of an accredited investor. If you have any questions regarding the amendments to the accredited investor definition, please do not hesitate to contact Kevin Cott at kevin@cottlawgroup.com.