On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) expanded the definition of “accredited investor” to allow persons with certain professional experience to invest in private offerings. The “accredited Investor” definition is one of the main tests for determining who is eligible to participate in a private offering under Rules 506(b) and 506(c) of Regulation D. Before the amendments, the accredited investor definition applied only income, net worth, and asset tests to determine accredited investor status. The amendments add financial sophistication gained through professional experience/certifications to the definition.
As the SEC stated in its press release announcing the amendments to the definition, “Historically, individual investors who do not meet specific net income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in these markets.”
The SEC is seeking to simplify and expand its exempt offering framework under the Securities Act of 1933, as amended, to promote capital formation and expand investment opportunities without sacrificing investor protections. The expansion of the “accredited investor” definition moves the SEC closer to that goal and furthers the SEC’s ongoing efforts to make the private capital markets accessible to more companies and investors.
The amendments to the accredited investor definition in Rule 501(a) add a new category that allows natural persons to be qualified accredited investors based on certain professional certifications, designations, or credentials that the SEC designates from time to time by order. This gives the SEC flexibility to reevaluate or add certifications, designations, and credentials now and in the future.
When adopting the amendments, the SEC simultaneously designated by order persons in good standing having Series 7, Series 65, and Series 82 licenses as natural persons who qualify as accredited investors. Over time, the SEC may add licenses and certifications as well as courses of study that the SEC believes give a person the ability to analyze the risks and rewards of an investment. The SEC will publish any such orders on its website from time to time.
The SEC also added the following to the accredited investor definition:
- Natural persons who are knowledgeable employees of a private fund;
- Limited liability companies with $5 million in assets;
- SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies; and
- 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, as amended.
The SEC also clarified that “spousal equivalents” can pool their finances for the purpose of qualifying as accredited investors under the definition’s income and net worth tests. The amendments also amend certain aspects of the Rule 144A “qualified institutional investor” definition to expand the list of entities that are eligible to qualify as qualified institutional buyers under Rule 144A.
The amendments are effective 60 days after publication in the Federal Register.