Regulatory Update: SEC Modernizes the Accredited Investor Definition
The SEC issued a press release today announcing the modernization of the definition of “Accredited Investor”. You can find the Press Release as well as the Announcement below. The amendments and order become effective 60 days after publication in the Federal Register.
Press Release: https://www.sec.gov/news/press-release/2020-191
Final Rule: https://www.sec.gov/rules/final/2020/33-10824.pdf
“SEC Modernizes the Accredited Investor Definition
FOR IMMEDIATE RELEASE
2020-191
Washington D.C., Aug. 26, 2020 —
The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. Historically, individual investors who do not meet specific 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 those markets. ” …
“Highlights
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
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 Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
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 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;
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; 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.
The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).
The amendments 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.
The Commission also adopted conforming amendments to Rule 163B under the Securities Act and to Rule 15g-1 under the Exchange Act.
What’s Next?
The amendments and order become effective 60 days after publication in the Federal Register.
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