On August 26, 2020, the SEC adopted final rule amendments to modify the definitions of “Accredited Investor” in Rule 501(a) under the Securities Act. The amendment will become effective 60 days after publication in the Federal Register.Accredited Investor
The definition of accredited investor in Rule 501(a) is one of the principal tests for 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, and also plays an important role in other federal and state securities laws. The SEC’s final rule amendments will:
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Add new categories of natural persons to the definition of accredited investor.
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Add to the current list of entities that qualify as an accredited investor.
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Adopt other modifications to the accredited investor definition and related rules.
New Categories of Natural Persons
With the exception of directors, executive officers, and general partners of the 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 if they do not meet the net worth or income standards. This includes persons who:
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Hold certain professional certifications, designations, or other credentials.
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Are “knowledgeable employees” of private funds and are investing in the private fund.
Professional Certifications, Designations, and Other Credentials
The final rule amendments will add a new Rule 501(a)(10) to create a category for natural persons to qualify as an accredited investor based on certain professional certifications, designations, and 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. In connection with the final rule, the SEC issued an order designating the following licensed certifications, when held in good standing, as qualifying natural persons for accredited investor status:
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General Securities Representative (Series 7).
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Investment Adviser Representative (Series 65).
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Private Securities Offerings Representative (Series 82).
Additionally, the SEC may designate additional certifications, designations, and other credentials from accredited educational institutions in future orders.
Expanded List of Qualified Entities
The definition of accredited investor provides an exhaustive list of entities that qualify as an accredited investor. The SEC is now expanding the list of entities to include:
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SEC and state-registered investment advisers.
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Investment advisers exempt from registration under Section 203(l) or (m) of the Advisers Act.
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Rural business investment companies (RBICs).
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Limited liability companies (LLCs) that:
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have total assets in excess of $5 million; and
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were not formed for the specific purpose of acquiring the securities being offered.
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Any other type of entity that:
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owns investments, as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million; and
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was not formed for the specific purpose of acquiring the securities being offered.
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Family offices and family clients, as those terms are defined in Rule 202(a)(11)(G)-1 under the Advisers Act, meeting the conditions of new Rules 501(a)(12) and (a)(13), respectively.
The addition of LLCs to the list of qualified entities codifies a longstanding position of the SEC. The SEC believes the new category covering any entity meeting the investment threshold covers existing entities not currently included in the definition, including Indian tribes and labor unions.