10-26-20 Securities Law Update: The SEC Expands the Definition of Accredited Investor

Posted on October 26, 2020

The U.S. Securities and Exchange Commission ("SEC") recently proposed amendments to its definition of accredited investor. In doing so, it is expanding the eligibility of persons who may participate in private and venture stage investments. Under the new definition of "accredited investor," the SEC has added categories of qualified individual investors and several additional amendments. The final rule will be effective December 8, 2020. Among other things, companies conducting private offerings will need to update their investor questionnaires and subscription and purchase agreements to include the new definition.

Additional Categories of Individuals to Qualify as Accredited Investors

1. Professional Certifications, Designations, and Other Credentials

    The current definition focuses primarily on the financial condition and means of investors. The amendments, however, expand this to include persons with financial and related experience and credentials. Now representatives of broker-dealers and registered investment advisers with the following credentials may qualify as accredited investors: Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative (Series 82).[1] The SEC may update the list to include additional certifications by order. These updates will be published on its website.

    2. Knowledgeable Employees

      The SEC also expanded the rule for investments in private equity and venture capital funds to include "knowledgeable employees" of those vehicles —such as an executive officer, a partner, or a board member.[2]

      Other Amendments

      The SEC expanded the list of entities that also qualify as accredited investors to include:

      • SEC and state-registered investment advisers;
      • Investment advisers exempt from registration under Section 203(l) or (m) of the Investment Advisers Act of 1940, as amended ("Advisers Act");
      • Rural business investment companies
      • Limited liability companies that:
        • have total assets in excess of $5 million; and
      • were not formed for the specific purpose of acquiring the securities being offered;
      • Any other type of entity that:
        • owns investments, as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million; and
      • was not formed for the specific purpose of acquiring the securities being offered.
      • Family Offices with at least $5 million in assets under management and their "family clients," each term defined under the Advisers Act Rule 202(a)(11)(G)-1
      • Spousal Equivalents. For the purposes of pooling finances to qualify as accredited investors under the joint net worth or income thresholds in Rules 501(a)(5) and (a)(6), the amendments add the term "spousal equivalent" and define it as "a cohabitant occupying a relationship generally equivalent to that of a spouse."

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      This article has been prepared for general information purposes only and is not intended as legal advice, nor does it create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. If you should have questions regarding how these new rules may impact your firm, please contact Greg Gribben at 585-987-2875, or Victoria Conrad at 585-987-2807, or another member of the Firm’s Public Companies and Securities practice group.

      [1] Order Designating Certain Professional Licenses as Qualifying Natural Persons for Accredited Investor Status, Release No. 33-10823 (August 26, 2020).

      [2] Accredited Investor Definition, Release Nos. 33-108-24; 34-89669 (August 26, 2020).

      Gregory W. Gribben

      Victoria M. Conrad