SEC Modernizes the Accredited Investor Definition

August 27th| 2020

The SEC recently adopted amendments to the definition of “accredited investor”, which is one of the principal tests for determining who is eligible to participate in private securities offerings. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been not been allowed to participate in private securities offerings. As such, investment opportunities in hedge funds and hot, pre-IPO startups were limited to already wealthy investors.

The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors. Some of the highlights of the new definition of accredited investor definition in Rule 501(a) include:

  • A new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications (e.g., holders in good standing of the Series 7, Series 65, and Series 82 licenses) or other credentials issued by an accredited educational institution as determined by the SEC.

  • Concerning investments in a private fund, natural persons who are “knowledgeable employees” of the fund.

  • Limited liability companies with $5 million in assets may be accredited investors.

  • SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) may be accredited investors.

  • A new category for any entity 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.

  • “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.

  • Addition of 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 SEC received more than 200 comment letters on the Proposing Release; some in favor, some against and some for eliminating the definition of “accredited investor” altogether. Notably, the SEC made certain modifications in response to commenters’ feedback, but the final version is substantially as proposed.

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