On August 26, 2020, the SEC adopted final amendments that modify the definition of “accredited investor” in Rule 501(a) (the “Rule”) of Regulation D under the Securities Act of 1933, as amended, which will become effective 60 days after publication in the Federal Register.
Revised Definition of Accredited Investor
The revised Rule will, among other things:
- Add new categories of natural persons that qualify as accredited investors;
- Add to the current list of entities that qualify as accredited investors; and
- Adopt certain other modifications to the accredited investor definition and related rules.
New Categories of Natural Persons
The revised definition of accredited investor will allow for the possibility for “sophistication,” without regard to financial standing, to be enough for natural persons to be considered accredited investors. Also, the changes to the definition will allow for there to be measurements and standards to be implemented to determine an investor’s sophistication. Specifically, in addition to the current financial thresholds relating to net worth and income for determining financial sophistication for certain investors, the revised definition will allow the following additional categories, regardless of financial standing:
- Persons who hold certain professional certifications, designations, or other credentials (such as Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65) and Licensed Private Securities Offerings Representative (Series 82), with a full list to be published on the SEC’s website); and
- Persons who are “knowledgeable employees” of private funds and are investing in the private fund.
Expanded List of Qualified Entities
The revised definition of accredited investor will expand the list of qualified entities to explicitly include:
- SEC and state-registered investment advisors and those exempt from registration under Section 203(l) or (m) of the Investment Advisers Act of 1940 (the “Advisers Act”);
- Rural business investment companies;
- 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;
- Any other type of 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 acquiring the securities being offered; and
- “Family offices” and their “family clients” (as those terms are defined in Rule 202(a)(11)(G)-1 under the Advisers Act) subject to certain criteria set forth in the Rule.
The accredited investor definition now will add “spousal equivalents” to the definition of “spouse” so that those in domestic relationships may in certain circumstances pool their finances for the purpose of qualifying as accredited investors, even if they are not legally married.
We believe that the amended Rule is important as it expands the ability of potential investors to qualify as accredited investors, giving them more opportunities to invest and diversify their portfolios, which will ultimately facilitate transactions. The amended Rule will also impact subscription documents, including investor questionnaires, as well as the drafting of securities purchase agreements. Together, this will hopefully lead to exempt offerings that are more consistent, accessible, and effective for both issuers and investors.
The final amendments to the definition of accredited investor in the Rule may be found here: https://www.sec.gov/rules/final/2020/33-10824.pdf
Donald R. Reynolds and Holly A. Wagner are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.