New Accredited Investor Definition Expands Investment Opportunities
SEC Amendments to the Accredited Investor Definition Expands Investment Opportunities in Private Offerings
On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the “accredited investor” definition in Rule 501(a) and Rule 215 of the Securities Act of 1933, as amended (the “Securities Act”), a key determinant of eligibility to participate in private capital raising transactions. The amendments aim to “promote capital formation and expand investment opportunities”[1] by more effectively identifying “institutional and individual investors that have the requisite knowledge and expertise to participate”[2] in private offerings based on established measures of financial sophistication.
Now included as “accredited investors” are the following (regardless of income or assets):
Individuals
- Natural persons with 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 particular, holders in good standing of the Series 7, Series 65, and Series 82 licenses;
- With respect to investments in a private fund, natural persons who are “knowledgeable employees” of such funds;
- “Spousal equivalents” may pool their finances for the purpose of qualifying as accredited investors. The SEC views a “Spousal Equivalent” as a cohabitant occupying a relationship generally equivalent to that of a spouse.
Entities
- SEC- and state-registered investment advisers and exempt reporting advisers;
- Rural business investment companies (RBICs);
- Limited liability companies with $5 million in assets and that was not formed for the specific purpose of investing in the securities offered;
- “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;
- 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.
Conforming amendments will also be made to expand the definition of “qualified institutional buyer” under the private resale safe harbor under Rule 144A of the Securities Act to be consistent with the amendments to the “accredited investor” definition while maintaining the $100 million threshold for these entities to qualify for qualified institutional buyer status.
The amendments will take effect 60 days after publication in the Federal Register.
A copy of the final rule can be found here: https://www.sec.gov/rules/final/2020/33-10824.pdf
Kathey practices corporate, intellectual property, and transactional law at HBA. Her practice focuses on corporate transactions including venture capital investments, financings and mergers, and acquisitions as well as outside general counsel work, primarily in the fashion, lifestyle, and technology industries.
[1] https://www.sec.gov/news/press-release/2020-191
[2] Ibid.