SEC Expands Definition of “Accredited Investor” (2024)

Posted by Jessica Forbes, Stacey Song, and Joanna D. Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Friday, September 18, 2020

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Accredited investors, Capital formation, Capital markets, Institutional Investors, Regulation D, SEC, Securities regulation, Solicitation
More from: Jessica Forbes, Joanna Rosenberg, Jonathan Adler, Stacey Song

, Fried Frank

Jessica ForbesandStacey Songare partners andJoanna D. Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Forbes, Ms. Song, Ms. Rosenberg, andJonathan S. Adler.

On August 26, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act of 1933 (“Securities Act”), which expand the category of investors eligible to participate in private offerings under Regulation D. The amendments create new categories of accredited investors, including those that qualify irrespective of wealth, on the basis that they have the requisite ability to assess an investment opportunity, and codify certain staff interpretative positions. The amendments, which were initially proposed on December 18, 2019, were adopted substantially as proposed with a few modifications, which we discuss below. The final rule will become effective 60 days after publication in the Federal Register.

New Categories of Accredited Investors

The SEC expanded the categories of accredited investors for both natural persons and entities.

Professional Certifications, Designations, or Credentials. Under a new category in the amended definition, natural persons will be able to qualify as accredited investors based on certain professional certifications, designations, or credentials from an accredited educational institution that the SEC designates as qualifying an individual for accredited investor status. Such designations will be issued by an SEC order and posted to the SEC website, as modified from time to time. In the final rule, consistent with commenters’ suggestions, the SEC clarified that it will provide notice and an opportunity for public comment prior to issuing any final order regarding future designations of qualifying credentials.

An initial set of designations were adopted in a separate order for the following certifications or designations administered by the Financial Industry Regulatory Authority, Inc. (“FINRA”): (1) the Licensed General Securities Representative (Series 7); (2) the Licensed Investment Adviser Representative (Series 65); and (3) the Licensed Private Securities Offerings Representative (Series 82). Individuals holding such licenses in good standing qualify as accredited investors even if they do not meet the income or net worth standards in the accredited investor definition. In determining whether to qualify additional professional certifications, designations, or credentials under the new category, the SEC will consider (1) whether it requires an examination administered by a self-regulatory organization, industry body, or accredited educational institution, (2) whether the examination is designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing, (3) whether persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment, and (4) whether the relevant self-regulatory organization or other industry body has made information publicly available to indicate that an individual holds the certification or designation (e.g., FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure database), or whether an individual’s certification or designation is otherwise independently verifiable.

Knowledgeable Employees. The amendments will allow individuals who are “knowledgeable employees,” as defined in Rule 3c-5 under the Investment Company Act of 1940 (the “Investment Company Act”), of an issuer to qualify as accredited investors of that issuer. These are the same individuals that qualify as knowledgeable employees for purposes of Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act.

Catch-All for Entities Owning More than $5 Million in Investments. Under the final rule, “any” entity will be able to qualify as an accredited investor if it (1) owns more than $5 million in “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, and (2) was not formed for the specific purpose of acquiring the securities offered. This catch-all category is intended to capture all existing entity forms not included in the existing definition, such as Native American tribes and governmental bodies, as well as those entity types that may be created in the future.

Family Offices and Family Clients. The final rule creates a new category of accredited investors for certain “family offices” and their “family clients,” each as defined in rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (“Advisers Act”). A family office will qualify as an accredited investor if (1) it has in excess of $5 million in assets under management, (2) it was not formed for the specific purpose of acquiring the securities offered, and (3) its prospective investment is directed by a person with such knowledge and experience in financial and business matters that the family office is capable of evaluating the merits and risks of the prospective investment. Family clients of a family office that meets these requirements will also qualify as accredited investors, provided that the family clients’ investments are directed by such family office.

Registered Investment Advisers, Exempt Reporting Advisers, and Rural Business Investment Companies. The amendments add SEC- and state-registered investment advisers, as well as investment advisers exempt from SEC registration under Section 203(m) or Section 203(l) of the Advisers Act, to the list of entities that qualify as accredited investors based on their status alone. The final rule also adds rural business investment companies to the list, allowing such companies to also qualify as accredited investors based on their status alone.

Clarifications and Codification of Staff Interpretative Positions

The final rules codify certain staff interpretative positions that relate to the accredited investor definition and address existing uncertainties.

  • The amendments codify a longstanding staff position that limited liability companies are eligible to qualify as accredited investors if they satisfy the other requirements of Rule 501(a)(3).
  • The amendments add a note to Rule 501(a)(8) to make it permissible to look through various forms of equity ownership to natural persons when determining the accredited investor status of entities. This note is consistent with an existing staff interpretation which permits multiple look-throughs to qualify as an accredited investor.
  • The amendments allow individuals to include spousal equivalents when calculating joint income or determining joint net worth. “Spousal equivalent” is defined to mean any cohabitant occupying a relationship generally equivalent to that of a spouse.
  • The amendments add a note to Rule 501(a)(5) clarifying that the calculation of “joint net worth” for an individual may be the aggregate of their net worth with that of their spouse or spousal equivalent, and that the securities being purchased by an investor relying on the joint net worth test need not be purchased jointly. This note is consistent with an existing staff interpretation.

Observations

As stated above, the amendments were adopted substantially as proposed, with a few modifications. We note below several observations.

Financial Thresholds. The SEC sought comment in the Proposing Release as to whether the SEC should adjust for inflation the financial thresholds in the accredited investor definition. In the Adopting Release, the SEC declined to make any adjustments to the financial thresholds, citing considerations beyond the impact of inflation such as technological advances and changes in the availability of information. The SEC also stated that a significant reduction in the accredited investor pool resulting from an increase of the financial thresholds could have disruptive effects on the Regulation D market.

Verification of Accredited Investor Status Based on Professional Designations. As described above, the amendments will permit natural persons to qualify as accredited investors based on certain professional certifications, designations, or credentials from an accredited educational institution. In the Adopting Release, the SEC states (as it did in the Proposing Release) that readily available information on whether an individual actively holds a particular certification or designation, such as information available on FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure database, will be useful in verifying investors’ accredited investor status under that prong of the definition for purposes of offerings conducted under Rule 506(c) of the Securities Act. After considering comments solicited in the Proposing Release, the SEC declined to include a requirement that natural persons qualifying under this prong of the accredited investor definition practice in the field related to the credentials, or have practiced for a minimum number of years. In doing so, the SEC cited concerns that such additional criteria would make it more difficult for investors to demonstrate, and issuers and market professionals to verify, accredited investor status, without providing significant additional protection for investors.

Exempt Reporting Advisers. The proposed amendments did not include exempt reporting advisers in the definition of accredited investor. However, the SEC sought comment in the Proposing Release as to whether exempt reporting advisers should be included, and, as discussed above, exempt reporting advisers are included in the final rules. In adopting this modification to the proposed rules, the SEC stated that it believes that exempt reporting advisers, as advisers to private funds, have the requisite financial sophistication needed to conduct meaningful investment analysis, and that private funds themselves are institutional investors and all investors therein are presumed to be financially sophisticated.

Qualified Purchasers. Although the SEC did not seek comment on this point, the Adopting Release notes that several commenters suggested modifying the definition of accredited investor to include “qualified purchasers” as defined in Section 2(a)(51)(A) of the Investment Company Act. The SEC declined to so modify the definition of accredited investor, stating that most qualified purchasers already meet the definition of accredited investor, but also that the accredited investor and qualified purchaser standards are distinct standards that serve a different regulatory purpose.

Finally, in anticipation of the effective date of the amendments, advisers to private funds and other pooled investment vehicles relying on Regulation D should update their subscription agreements to reflect the changes to the definition of accredited investor.

The complete publication, including footnotes, is available here.

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SEC Expands Definition of “Accredited Investor” (2024)

FAQs

SEC Expands Definition of “Accredited Investor”? ›

The definition of accredited investor expands the criteria to include non-traditional couples, experienced investors, and licensed investment professionals who, according to the original guidelines, would have all been excluded before August of 2020. If that's you, this is your invitation to the party!

Has the SEC changed the definition of accredited investor? ›

The SEC has substantively amended the definition of accredited investor four times since adoption of Regulation D under the Securities Exchange Act of 1933, as amended, in 1982 and most recently in 2020.

What is an accredited investor as defined by the SEC under Rule 501? ›

Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisors.

What is an accredited investor per the SEC? ›

Net worth over $1 million, excluding primary residence (individually or with spouse or partner) Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.

Does series 65 make me an accredited investor? ›

Regarding that last bullet point, an investor holding FINRA's Series 7, Series 65 or Series 82 designations qualifies as an accredited investor.

What is the new definition of accredited investor? ›

Historically, the SEC has observed that the purpose of the accredited investor definition is “to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act's registration process unnecessary. ...

What qualifies you as an accredited investor? ›

In the U.S., an accredited investor is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.

What is the IRS definition of an accredited investor? ›

To qualify as an accredited investor, you must have over $1 million in net worth, or more than $200,000 in earned income in the past two calendar years, with the expectation of the same earnings. Financial professionals with Series 7, 65 or 82 licenses also qualify.

Are you an accredited investor as defined in rule 501(a) of the Securities Act of 1933? ›

Accredited investors are typically wealthy individuals with enough money to risk losing their investment, or enough experience to understand what's being offered and make an educated decision. They invest in private companies, often startups, that find it too costly to register the securities they want to sell.

What is the rule 506 for accredited investors? ›

Accredited investors are generally large financial institutions, such as investment banks, or high net-worth individuals. Rule 506 bans general solicitation of the securities.

What is the difference between a qualified investor and an accredited investor? ›

Both are designations of investors that are permitted to invest in non-public investments. The difference between the two is that accredited investors must meet certain income, net worth or securities licensing criteria, while a qualified purchaser must simply have more than $5 million to make a large investment.

What happens if you are not an accredited investor? ›

Non-accredited investors are limited by the SEC from some investment opportunities for their own financial safety. The SEC also set regulations on the disclosure and documentation of the investments available to the investors. For example, non-accredited investors are eligible to invest in mutual funds.

What is the difference between an accredited investor and an eligible investor? ›

Being eligible means you can invest a certain amount in the Exempt Market. To be considered an “accredited” investor, you still have to meet one or more similar types of requirements as above, but they are considerably higher. – In this case, your financial assets, not net assets, have to be greater than $1 million.

Does a Series 7 make you an accredited investor? ›

The Commission designated three certifications and designations administered by the Financial Industry Regulatory Authority, Inc. as qualifying for accredited investor status: Licensed General Securities Representative (Series 7); Licensed Investment Adviser Representative (Series 65); and.

Can I keep my series 65 without a sponsor? ›

How to Get the Series 65 License. Unlike many other FINRA Series exams, the Series 65 exam does not require an individual to be sponsored by a member firm. If you are not Form U4 registered or affiliated with a firm through FINRA's Web CRD system, you should use the Form U10 to request and pay for the Series 65 exam.

Does a Series 7 license make you an accredited investor? ›

To acquire your Series 7, Series 65, or Series 82 licenses, each of which will qualify you as an accredited investor, you'll need to take an exam given by FINRA.

Is an accredited investor under Rule 501 of Regulation D of the Securities Act? ›

The federal securities laws provide companies with a number of exemptions. For some of the exemptions, such as Rule 506 of Regulation D, a company may sell its securities to what are known as accredited investors. The term accredited investor is defined in Rule 501 of Regulation D.

Does series 79 make you an accredited investor? ›

We note, however, that the proposal would not include the Series 79 (Investment Banking Representative) license or the Securities Industry Essentials (SIE) examination in the initial list of certifications, or designations that would qualify an individual as an accredited investor.

What is the difference between a qualified purchaser and an accredited investor? ›

Accredited investors are individuals or entities who are qualified by the SEC to invest in unregulated or sophisticated securities, while a qualified purchaser is an individual or entity with an investment portfolio worth over $5 million.

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