SEC Expands Definition of Accredited Investor for Regulation D Exempt Offerings
The Securities and Exchange Commission (SEC) has adopted revisions to the definition of “Accredited Investor,” which expands the list of individuals and entities that qualify under this definition. Under Rule 506 of Regulation D under the Securities Act of 1933, as amended, an unlimited number of individuals and entities that qualify as accredited investors may invest under this safe harbor for exempt private offerings of securities. A similar exemption is provided in Section 4(6) of the Securities Act of 1933 for offerings of securities solely to accredited investors exempt from the registration requirements of that Act.
These revisions become effective on December 8, 2020.
The revised definition for accredited investors largely focuses on the knowledge or credentials that certain individuals possess, enabling them to have deemed sophistication to invest without the perceived need for the protections afforded by a registered offering. Historically, the sophistication (either by the investor or a representative that assisted the investor) was only an element to be considered for non-accredited investors in Regulation D offerings. Instead, the investor’s financial condition was solely determinative of an investor’s ability to satisfy the definition of an accredited investor. These financial conditions were not changed under the newly-expanded definition, so individuals and entities that meet these tests will continue to qualify as accredited investors. Also, the list of entities that qualify as accredited investors has been lengthened.
The following knowledge-based criteria will enable an individual to satisfy the definition of an accredited investor even if the individual does not satisfy the otherwise required financial criteria (generally minimum net worth of $1 million excluding principal residence or minimum annual individual income of $200,000 or $300,000 joint income):
- Individuals that hold Series 7, 65, or 82 professional licenses from FINRA
- Knowledgeable employees of private funds, defined as an executive officer, director, trustee, or person holding a similar position or employee whose job functions involve providing investment advisory or management services.
The SEC is granted the authority in the final rule to designate other knowledge-based credentials and certifications that would enable an individual to satisfy the expanded definition.
In addition, to satisfy the financial condition of having a minimum joint annual income of $300,000, the SEC has added the term “spousal equivalent” to include non-married individuals occupying a status that is equivalent to a spouse.
The expanded definition for entities, which generally are required to have a minimum net worth of $5 million and not be formed for the specific purpose of investing to be considered accredited investors, includes the following:
- Registered investment advisors
- Limited liability companies
- Family offices and family clients whose investments are directed by an individual having knowledge and experience in financial and business matters that enable such entities to evaluate the merits and risks of the proposed investments
- Any other entity with investments of at least $5 million
While in the proposing release for the rule revising the definition of an accredited investor, the SEC had requested comments on whether the financial thresholds in the accredited investor definition (which have not changed since 1982 other than to remove the investor’s principal residence from the calculation of net worth) should be increased or indexed for inflation, the SEC declined to do so in the final rule.
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