Securities & Exchange Commission Modernizes The Definition Of "Accredited Investor"

On August 26, 2020, the Securities and Exchange Commission (the SEC) adopted modernizing amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D (Rule 501(a)) to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition, along with changes to Rule 144A under the Securities Act of 1933.  The amendments are intended to simplify and improve private placements, and ultimately expand and promote investment opportunities while maintaining investor protections.  The amendments become effective 60 days after publication in the Federal Register, which has yet to occur.

The amendments to Rule 501(a): (1) add new categories of natural persons who may qualify as “accredited investors” based on qualifications other than income or net worth, (2) expand the list of entities that may qualify as “accredited investors,” (3) add entities owning $5 million in investments, (4) add family offices with at least $5 million in assets under management and their family clients, and (5) add the term “spousal equivalent” to the definition. The SEC also amended the “qualified institutional buyer” definition in Rule 144A under the Securities Act of 1933 to expand the list of entities that are eligible to qualify as qualified institutional buyers.

Specifically, the relevant amendments are as follows:

• Modify the “accredited investor” definition in Rule 501(a) to:
  • 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 connection with the amendments, the SEC has designated holders in good standing of the Series 7, Series 65, and Series 82 licenses may qualify as “accredited investors.”  The SEC has reserved the right to supplement or revise the designated licenses.
  • 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 Native American tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that owns “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act of 1940, 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 of 1940; 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.
• 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.