The SEC’s Definition of Accredited Investor

In mid-2020, the SEC, Securities and Exchange Commission, updated the definition and requirements to be considered an Accredited Investor. There is not a simple definition of what the SEC considers an “accredited investor,” as to be considered one, there are financial and experience requirements.

The reason an investor would want to be designated as an “accredited investor” is that only those so designated are allowed to invest in some private capital markets. Lucrative investments carry increased risk and the necessity for a specific level of sophisticated investment experience and education.

A statement from the SEC Chairman Jay Clayton is “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.  I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations, that may qualify to participate in certain private offerings.”.

Amendments to the requirements will allow investors to qualify as “accredited investors” not only based on existing tests for income or net worth, but also based on defined measures of professional knowledge, experience, or certifications. The newest interpretation of the rules to become an accredited investor include the followingi:

Background

In June 2019, the Securities and Exchange Commission requested public comments on possible approaches to amending the accredited investor definition. The definition is important because it is a critical component of several exemptions from registration, including Rules 506(b) and 506(c) of Regulation D. The accredited investor definition also plays a role in other federal and state securities laws.

After reviews of the public comments and recommendations over the years from various Commission advisory committees, amendments to the accredited investor definition were adopted and expected to open new opportunities for many previously unable to participate in many equity offerings.

Highlights

The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act and:

  • add a new category to the definition that allows natural persons to qualify as accredited investors based on certain professional certifications, credentials, designations, or credentials issued by an accredited educational institution as designated by the Commission. The Commission has designated holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.
  • include “knowledgeable employees” of private funds as accredited investors.
  • clarify that LLCs with $5 million in assets may be accredited investors.
  • add a new category for any entity, including Indian tribes, funds, governmental bodies, and entities organized under the laws of foreign countries. These entities must own “investments” as defined in Rule 2a51-1(b) under the Investment Company Act.
  • add “family offices” with at least $5 million in assets under management.
  • add the term “spousal equivalent” to the accredited investor definition so that spousal equivalents may pool finances to qualify as accredited investors.
  • expand the definition of “qualified institutional buyer” in rule 144A to include limited liability companies if they meet the $100 million in securities owned and investors.

These amendments are effective in the Federal Register. If you wish to become an accredited investor, work with advisors to see if you qualify and to help you prove it in writing.

i SEC Modernizes the Accredited Investor Definition – SEC.gov

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