The changes to the definition of “Accredited Investor” that the SEC approved in August of 2020 officially went into effect on December 8th. The changes now allow people to qualify based on factors other than net worth. Now individuals will be able to qualify as an Accredited Investor based on clear measures of financial sophistication, such as professional knowledge and experience or certifications in addition to the traditional test for income or net worth. The change also expanded and updated the list of entities that can meet the definition an participate in certain private offerings.
The SEC’s intentions with the change were to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.
Changes to The Definition of Accredited Investor
The changes to the accredited investor definition in Rule 501(a) include:
- Addition of a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations, or credentials (i.e. Series 7, Series 65, and Series 82 licenses with flexibility to add additional qualifying licenses in the future);
- Inclusion of natural persons who are “knowledgeable employees” of a private fund with respect to investments in the fund as accredited investors;
- Clarification that limited liability companies with $5 million in assets may be accredited investors and addition of SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
- Addition of 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;
- Addition of “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
- 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.
Change to The Definition of Qualified Institutional Buyer
The SEC also made changes to Rule 144(a) to expand the definition of “Qualified Institutional Buyer” to include limited liability companies and Rural Business Investment Companies (RBICs) if they meet the $100 million in securities owned and invested threshold. The changes also enable entities that qualify for accredited investor status also qualify for qualified institutional buyer status when they meet the $100 million in securities owned and invested threshold in Rule 144(a).
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