On August 26th, the SEC adopted amendments to the “accredited investor” definition. This definition is one of the primary criteria for determining which entities and investing professionals are eligible to participate in private capital markets. Traditionally, individual investors who do not meet specific income or net worth qualifications have been denied the chance to invest in complex and vast private markets, regardless of their financial sophistication. The amendments update and improve the definition to recognize more effectively institutional and individual investors that have the knowledge and expertise to participate in those markets.
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act. These changes widen opportunities for entities and investors to qualify as accredited investors based on defined measures of professional knowledge, experience, certifications, and existing tests for income or net worth.
The amendments to the accredited investor definition in Rule 501(a):
add a new category that permits natural persons to qualify as accredited investors based on certain professional certifications, designations, or other credentials issued by an accredited educational institution, which the SEC may designate from time to time by order. The SEC has also designated by order that holders in good standing of the Series 7, Series 65, and Series 82 licenses qualify as natural persons. This approach provides the SEC with flexibility to reexamine or add certifications, designations, or credentials in the future. Additional certifications, designations or credentials that satisfy the attributes set out in the new rule can be submitted by members of the public for SEC consideration.
include natural persons who are “knowledgeable employees” of a fund as accredited investors with respect to investments in the private fund.
clarify that limited liability companies with $5 million in assets may be accredited investors. Also, SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies have been added to the list of entities that may qualify.
add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.
add “family offices” with at least $5 million in assets under management as well as their “family clients,” as each term is defined under the Investment Advisers Act.
add the term “spousal equivalent” to the accredited investor definition. Spousal equivalents may combine their finances for the purpose of qualifying as accredited investors.
The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).
The amendments also expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and rural business investment companies if they meet the threshold of $100 million in securities owned and invested. The amendments add to the list any institutional investors included in the accredited investor definition that are not otherwise counted in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold. Finally, the SEC also adopted conforming revisions to Rule 163B under the Securities Act and to Rule 15g-1 under the Exchange Act.
The amendments and order will go into effect 60 days following their publication in the Federal Register.