On August 26, 2020, the Securities and Exchange Commission (SEC), by a 3-to-2 vote, adopted amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (Securities Act), to allow individuals to invest in unregistered private securities offerings based on certain professional certifications, designations, or other credentials, rather than based on their wealth or income, as well as to expand the list of entities that will qualify as accredited investors. Currently, individuals generally qualify as an accredited investor if they either have (i) a net worth of at least $1 million (excluding the value of their primary residence), or (ii) annual income of at least $200,000, or joint income with their spouse of $300,000, for each of the last two years, and a reasonable expectation of reaching the same income level for the current year.
SEC rules governing accredited investors are designed to protect individual investors from risks that could result from the lack of regulatory oversight associated with unregistered private securities offerings. By expanding the “accredited investor” definition, the SEC has provided more investors with the opportunity to access alternative investments and has given companies, private-equity firms, and hedge funds access to a larger pool of investors.
The test for individuals and entities to qualify as accredited investors had remained largely unchanged for more than 35 years and used specified levels of net worth as proxies for financial sophistication. Under the new definition of “accredited investor,” the SEC will allow individual investors to participate in the private markets based on certain professional certifications or designations or other credentials.
Among other updates, the SEC made the following updates to the definition of accredited investor:
- Added a new category for persons that hold, and maintain in good standing, certain professional certifications, designations, or credentials from an accredited educational institution, with specific qualifying certifications, designations, or credentials to be designated as qualifying for accredited investor status by an SEC order based on a consideration of the facts pertaining to such certification, designation, or credential.
- In a separate order, the SEC designated as the initial qualifying certifications, designations or credentials: general securities representatives; investment adviser representatives; and private securities offerings representatives.
- Expanded the list of non-individual accredited investors, to include a number of new categories, such as family offices with at least $5 million in assets under management and with the prospective investment being directed by a person with a specified level of knowledge and experience, as well as Indian tribes, governmental bodies, and foreign entities with at least $5 million in assets.
- Allowed individuals to meet the joint net worth or income standard through “spousal equivalents,” defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.
The amendments also expand the definition of “qualified institutional buyer” in Rule 144A under the Securities Act to include a number of additional entities, including limited liability companies, and certain other entities added to the definition of accredited investor that meet the $100 million in securities owned and invested threshold in the definition of qualified institutional buyer.
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Germain E. DeMartinis is currently an associate with Cozen O’Connor’s corporate practice group. He is a 2017 graduate of Temple University James E. Beasley School of Law.
Anne M. Madonia is a member at Cozen O’Connor and concentrates her practice in business and corporate law.
Richard J. Busis heads the Cozen O’Connor’s Securities Practice. He counsels a diverse group of public and private companies in a wide variety of corporate and securities transactions. 1