24 September 2020
Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant
In August of this year, the SEC released an amendment to the “accredited investor” definition.
What is an Accredited Investor?
Certain qualifications must be met in order to invest in private placements or private funds. One qualification is being an “accredited investor.” An accredited investor must have an annual income of $200,000 (if single) or $300,000 (for joint spousal income) for the last two (2) years with the exception of earning the same or higher income in the current year. A person is also considered an accredited investor if they have a net worth exceeding $1 million (which includes spouses). The net worth test cannot include the value of the accredited investor’s home. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.
What is the New Accredited Investor Definition?
The SEC will stretch the definition to include sophisticated investors who may not meet the net worth threshold mentioned above but have the knowledge and expertise to participate in the private markets. The changes and additions to the definition include:
- A category that allows a natural person to qualify as an accredited investor if they have certain professional designations which are in good standing. Initially just the Series 7, Series 65 and Series 82 licenses are listed. The Commission will have the ability to reevaluate the designations and indicate new designations, certifications and credentials that are consistent with criteria they set. The SEC will have a list of currently approved certifications, designations, and credentials on their website.
- Addition of “knowledgeable employees” to the definition.
- Limited Liability Companies with $5 million in assets.
- SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs).
- A category that includes any entity, including Indian Tribes, government bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined by Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that were not formed for the specific purpose of investing in the securities offered.
- Family offices with at least $5 million in assets under management and their “family clients” as each term is defined under the Investment Company Act.
- Addition of the term “spousal equivalent” to the definition so that spousal equivalents can pool their finances to qualify as accredited investors.
The amendment also expands the definition of a qualified institutional buyer (“QIB”) in Rule 144A to include limited liability companies and Rural Business Investment Companies (“RBICs”) if they meet the $100 million in securities owned and invested threshold. Lastly, the amendment also adds to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.
What Do You Need to Do?
The changes become effective 60 days after publication which is October 24, 2020. You can update your policies and procedures and any fund docs that define an accredited investor. Train your employees who solicit new investors on the changes in definition so they can be prepared when speaking with prospects. Hold off on implementing any changes until the 60-day period has passed. Let us know if you need any help!