SEC Amends “Accredited Investor” Definition to Allow More Participation in Private Offerings

On August 26, 2020, the Securities and Exchange Commission (SEC) amended the definition of “accredited investor” to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition, thereby allowing a larger pool of investors to have access to private offerings.

The amendments are intended to identify more effectively the investors that have sufficient knowledge and expertise to participate in private offerings, not only based on measures of income or net worth, but also based on defined measures of professional knowledge, experience or certifications.  In addition, the SEC expanded the list of entities that may qualify as accredited investors.  

The amendments expand the accredited investor definition under Rule 501 (a) of the Securities Act of 1933, as amended, as follows:

1. Add a new category that permit natural persons to qualify as accredited investors based on certain professional credentials issued by an institution designated as qualifying by the SEC from time to time (with a concurrent designation of holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons);

2. Include a new category of “accredited investor” based on the individual’s status as a “knowledgeable employee” of private funds;

3. Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool assets for the purpose of qualifying as accredited investors;

4. Clarify that limited liability companies with $5 million in assets may be accredited investors; and

5. Expand the types of entities that are deemed accredited investors to include,

   1. Registered investment advisers, including both SEC- and state-registered advisers, as well as exempt reporting advisers,

   2. Rural business investment companies (RBICs),

   3. All “family offices” with at least $5 million in assets under management and their “family clients”, as each term is defined under the Investment Advisers Act, and

   4. A catch-all category for other entities that own “investments” (as defined in the Investment Company Act) of at least $5,000,000 and were not formed for the specific purpose of acquiring the securities being offered, which will include, among others, entities organized under the laws of foreign countries.

The amendments will take effect 60 days after publication in the Federal Register.