SEC Expands Accredited Investor Definition
On August 26, 2020, the Securities and Exchange Commission adopted a rule amending the definition of “accredited investor” under Rule 501(a) of Regulation D of the Securities Act, which is one of the principal tests for determining who is eligible to participate in private offerings of securities exempt from Securities Act registration.
Specifically, the amendments (i) add new categories of natural persons that may qualify as “accredited investors” based on certain professional certifications or designations or other credentials, or their status as a private fund’s “knowledgeable employee” (as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940), (ii) expand the list of entities that may qualify as "accredited investors," (iii) add entities owning $5 million in investments, (iv) add family offices with at least $5 million in assets under management and their family clients, and (v) add the term “spousal equivalent” to the definition. The new rule also contains amendments to the “qualified institutional buyer” definition in Rule 144A under the Securities Act, expanding the list of entities that are eligible to qualify as qualified institutional buyers.
Previously, the definition of “accredited investor” generally included individuals who earned $200,000 in income over the previous two years (or $300,000 when combined with a spouse’s income), had at least $1,000,000 of net worth not including the individual’s primary residence, or were a director, executive officer, or general partner of the issuer of the securities being offered or sold. The definition will now include those individuals with certain professional certifications or designations or other credentials, whereby the SEC will consider the following non-exhaustive list of attributes:
- the certification, designation, or credential arises out of an examination or series of examinations administered by a self-regulatory organization (such as FINRA) or other industry body or is issued by an accredited educational institution;
- the examination or series of examinations is designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing;
- persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and
- an indication that an individual holds the certification or designation is made publicly available by the relevant self-regulatory organization or other industry body.
In connection with the adoption of the amendment, the SEC specifically designated the following certifications, designations, or credentials as meeting this new standard: General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65).
While the SEC was unable to quantify the number of newly eligible individual accredited investors resulting from this change that would not otherwise already meet the definition of “accredited investor,” the SEC does not expect the number to be significant.
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