On August 26, 2020, the Securities and Exchange Commission (the “SEC”) adopted final rule amendments to modify the definition of an accredited investor in Rule 501(a) under the Securities Act. These amendments will become effective 60 days after publication in the Federal Register.
The definition of accredited investor in Rule 501(a) is one of the principal tests to determine who is eligible to participate in the private capital markets through many of the exemptions and safe harbors from registration under the Securities Act, including Rules 506(b) and 506(c) of Regulation D. The new amendments will expand the categories of natural persons to the definition of accredited investor as well as add to the current list of entities that qualify as an accredited investor.
New Categories of Natural Persons
With the exception of directors, executive officers, and general partners of an issuer, the current definition of accredited investor only uses net worth and income thresholds to determine the financial sophistication of a natural person necessary to qualify as an accredited investor. The amendments will add additional categories of natural persons who would qualify as an accredited investor even where they do not meet the net worth or income standards, including (1) persons who hold certain professional certifications, designations, or other credentials or (2) persons who are “knowledgeable employees” of private funds and are investing in the private fund.
Regarding the additional of persons who hold certain professional certifications, designations, or other credentials, only certifications specifically designated as qualifying by an SEC order, based on criteria outlined in new Rule 501(a)(10), would allow an individual to meet the definition of accredited investor. A list of all certifications, designations, and credentials recognized by the SEC as qualifying will be published on the SEC’s website and the SEC may designate additional certifications, designations, and other credentials from accredited educational institutions from time to time in future orders. In connection with the final rule, the SEC issued an order allowing those with Series 7, Series 65, and Series 82 certifications, when held in good standing, to qualify as accredited investors.
Further, the SEC also enabled “knowledgeable employees” of private funds, as defined in Rule 3c-5(a)(4) under the Investment Company Act, to qualify as accredited investors for the purposes of investing in the fund.
Expanded List of Qualified Entities
In addition to the expansion of categories of natural persons, the SEC is also expanding the list of entities qualifying as an accredited investor. These entities include, but are not limited to SEC and state-registered investment advisers; rural business investment companies; and limited liability companies that have total assets in excess of $5 million and were not formed for the specific purpose of acquiring the securities being offered.
Patrick Ellis is a Traverse City, Michigan-based attorney counseling businesses across numerous industries and stages of maturity regarding corporate formations and governance, investment financing, commercial and strategic transactions, real estate, and day-to-day, operational and legal matters. If you have any questions about the issues addressed in this post, or if you would like a copy of any of the materials mentioned in it, please contact:
Patrick M. Ellis, Esq.
Phone: (231) 947-7900