On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the “accredited investor” definition under Rules 501(a) and 215 of the Securities Act of 1933 (Securities Act) and adopted similar amendments to the “qualified institutional buyer” definition under Rule 144A of the Securities Act. The amended definitions become effective 60 days after publication in the Federal Register.
Previously, the definition of accredited investor for individuals and married investors was limited to testing for net worth or income with the thresholds measured at a net worth of:
(a) $1 million excluding the value of a primary residence; or
(b) income of at least $200,000 each year for the last two years (or $300,000 of combined income for married investors).
The revised definition of accredited investor maintains these thresholds, but also expands the definition of individuals and married investors to include the following:
(1) natural persons with certain professional certifications, designations or credentials issued by an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status (thus far, the SEC has designated holders of Series 7, Series 65, and Series 82 licenses as qualifying for accredited investor status);
(2) natural persons who are “knowledgeable employees” of the fund; and
(3) “spousal equivalents” who may pool their finances for the purpose of qualifying as accredited investors.
In addition, the revised definition of accredited investor expands the types of entities that qualify as accredited investors to include:
(1) limited liability companies (LLCs) with $5 million in assets, SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs);
(2) any entity that owns “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act of 1940) in excess of $5 million and was not formed for the specific purpose of investing in the securities offered (such entity may include Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries); and
(3) “family offices” (as defined under the Investment Advisers Act of 1940) with at least $5 million in assets under management that were not formed for the specific purpose of investing in the securities offered and their “family clients” (also as defined under the Investment Advisers Act of 1940).
The amendments also expand the definition of qualified institutional buyer in Rule 144A of the Securities Act to include LLCs and RBICs that meet the current definitional threshold of $100 million in securities owned and invested. In addition, the amendments add institutional investors included in the accredited investor definition that are not otherwise included in the definition of qualified institutional buyer so long as such institutional investors meet the $100 million threshold.
While some in the industry still want to see the dollar thresholds in the accredited investor definition lowered, these revisions are welcome news to fund sponsors who have had to turn away knowledgeable investors simply because they did not meet the current dollar thresholds under the accredited investor definition. These expanded definitions should also allow more investors to participate in funds that are exempt from registration under Rules 506(b) and 506(c) of Regulation D under the Securities Act.
The SEC’s press release regarding these changes can be found here, and the final rule can be found here. To learn more about these definitional changes and how they can benefit your investment funds, contact one of the attorneys listed.