SEC Expands “Accredited Investor” Definition in Rule 501(a)
On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to expand the “Accredited Investor” definition in Rule 501(a) of the Securities Act of 1933, as amended (Securities Act). The amendments expand the definition to include investors that have requisite knowledge and expertise to participate in securities offerings that are not registered under the Securities Act.
The accredited investor definition determines who is eligible for exemptions and safe harbors to participate in private offerings that are exempt from registration under the Securities Act. Prior to these amendments, the accredited investor definition used net worth and income thresholds to determine the sophistication of an individual and limited the list of entities that may qualify to participate in private offerings. Qualifying as an accredited investor under knowledge and expertise requirements is significant because it greatly expands individuals who may participate in unregistered private investment opportunities. The amendments also expand the type of investors available for fundraising through private offerings and may ultimately reduce transaction costs related to the verification of the accredited investor status.
Specifically, the SEC amendments to the accredited investor definition will:
- Add a new category to permit natural persons to qualify as accredited investors based on professional certifications, designations, accreditations, or other credentials, which the SEC may designate by future orders. Also, the SEC designated by order that Series 7, Series 65, and Series 82 license holders in good standing qualify as natural persons;
- Permit natural persons to include “knowledgeable employees” of the fund, with respect to investments in a private fund;
- Clarify that limited liability companies with total assets in excess of $5 million and not formed for the specific purpose of investing in the securities offered may qualify as accredited investors;
- Add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies to the list of entities that may qualify as accredited investors;
- Add a new category for an entity that owns 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 “family clients”, as each is defined under the Investment Advisers Act; and
- Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances to qualify as an accredited investor.
The expanded definition will become effective 60 days after publication in the Federal Register. While these amendments are not immediately effective, they are advantageous for planning year-end offerings and those who seek to include employees in their offerings. The SEC may provide additional guidance in the next several weeks as implications of the amendments come into focus.