Client Alert: SEC Broadens Accredited Investor Definition Expanding Access to Capital Markets09/09/2020
Introduction and Background
On August 26, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to the “accredited investor” definition in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (“Securities Act”) (available here) that update and improve the accredited investor definition. The purpose of the amendments is to better identify investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements and related investor protections, provided by registration under the Securities Act. The amendments are substantially as proposed by the SEC on December 18, 2019 (see our earlier Client Alert available here).
The amendments add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee,” expand the list of entities that may qualify as accredited investors, add entities owning $5 million in investments, add family offices with at least $5 million in assets under management and their family clients, and add the term “spousal equivalent” to the definition.
In addition, the SEC also is amending the definition of “qualified institutional buyer” (“QIB”) in Rule 144A of the Securities Act to expand the list of entities that are eligible to qualify as QIBs to be consistent with the amendments to the accredited investor definition, while maintaining the $100 million threshold for QIB status.
The accredited investor definition is a central component of the Rule 506 exemptions from registration. Qualifying as an accredited investor is significant because accredited investors are able to participate in investment opportunities that generally are not available to non-accredited investors. According to the SEC, the final rules are “tailored to permit investors with reliable alternative indicators of financial sophistication to participate in such investment opportunities, while maintaining the safeguards necessary for investor protection and public confidence in investing in areas of the economy that disproportionately create new jobs, foster innovation, and provide for growth opportunities.”
The final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity. SEC Chairman Jay Clayton stated: “[F]or the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”
The amendments to the accredited investor definition would:
- 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. The SEC designated holders in good standing of 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.
- 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 “catch all” 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.
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.
- 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.
Other and Conforming Amendments
The SEC adopted amendments to expand the QIB definition in Rule 144A. Rule 144A provides an exemption from the registration requirements of the Securities Act for resales of certain securities to QIBs. The expanded definition includes limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold. The amendment also adds to the list of qualifying entities any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of QIB, provided they satisfy the $100 million threshold. The SEC also amended Rule 215 under the Securities Act to conform to the accredited investor definition in Rule 501(a) by replacing the existing definition with a cross-reference to the Rule 501(a) definition.
By adding new categories of individuals who may qualify as accredited investors based on their professional knowledge, experience or certification, as contrasted with the historical wealth as the sole criteria, and expanding the list of entities that may qualify as accredited investors, the amendments will allow more investors access to the private capital markets.
The final rule becomes effected 60 days after publication in the Federal Register.
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If you have any questions concerning your status as an accredited investor or if you wish to explore capital market opportunities, please contact Meryl Wiener, any of the undersigned or your regular Warshaw Burstein attorney.