SEC Approves Modernizing Amendments to Accredited Investor Definition

On August 26, 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of “accredited investor” under the Securities Act of 1933 (the “Act”). The SEC proposed the amendments on December 18, 2019 in an effort to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets. Ultimately, the updated definition allows more investors to participate in private offerings by adding new categories of natural persons and entities that may qualify as accredited investors.

The SEC’s press release on the amendments and the full text of the final rule can be found here.  In addition, our previous blog post discussing the proposed amendments in detail can be found here.

Below is a summary of the amendments to the accredited investor definition as provided by the SEC. The amendments are set to become effective 60 days after publication in the Federal Register.

The amendments to the accredited investor definition in Rule 501(a) of the Act:

1. 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;
2. Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
3. 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;
4. 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;
5. 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
6. 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.

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.