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On August 26, 2020 the Securities and Exchange Commission (the “SEC”) adopted amendments to the definitions of “accredited investor” and “qualified institutional buyer.” The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act of 1933 (the “Securities Act”). The SEC stated that “[t]he amendments are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the [Securities Act].”

The amendments expand the definition of “accredited investor” and “qualified institutional buyer,” allowing additional institutions and individuals to invest in unregistered private offerings. The amendments become effective 60 days following publication in the Federal Register. Below is a summary of the amendments to each rule.

Rule 501(a):

Natural Persons

Historically, the SEC has stated that the accredited investor definition is intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act’s registration process unnecessary. The amendments move away from wealth being the sole determinant of an individual’s financial sophistication.

An additional category was added to the definition of accredited investor in Rule 501(a) to include natural persons holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status. Natural persons holding the Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65) and Licensed Private Securities Offerings Representative (Series 82) certifications will qualify as accredited investors. The adopting release expressly mentions that it is not required that the individual practices in the field for which the certification was granted or has practiced in that field for any period of time. The SEC can include additional certifications in the future.

Natural persons who are a “knowledgeable employee,” as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940, of the private-fund issuer of the securities being offered or sold are now included as accredited investors. The term “Knowledgeable Employee” is defined as (i) an executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the private fund or an affiliated management person (as defined in Rule 3c-5(a)(1)) of the private fund; and (ii) an employee of the private fund or an affiliated management person of the private fund (other than an employee performing solely clerical, secretarial or administrative functions with regard to such company or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such private fund, other private funds, or investment companies the investment activities of which are managed by such affiliated management person of the private fund, provided that such employee has been performing such functions and duties for or on behalf of the private fund or the affiliated management person of the private fund, or substantially similar functions or duties for or on behalf of another company for at least 12 months.

The amendments also added spousal equivalents to the accredited investor definition so that spousal equivalents may calculate their combined income to determine net worth under the Rule 501(a)(5). A spousal equivalent is defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.

Entities

Several categories of entities were added to the definition of accredited investor. The new categories include (i) SEC and state-registered investment advisers, (ii) rural business investment companies, (iii) limited liability companies with total assets in excess of $5,000,000 that were not formed for the specific purpose of acquiring the securities being offered, (iv) family offices with at least $5,000,000 in assets under management that were not formed for the specific purpose of acquiring the securities being offered, (v) family clients and (vi) a general category that includes entities such as Indian Tribes, labor unions, governmental bodies and entities organized under the laws of foreign countries.

Rule 215:

The amendment to Rule 215 replaces the existing definition with a cross reference to the accredited investor definition in Rule 501(a).

Rule 144A:

The amendments to Rule 144A expand the list of entities that are eligible for qualified institutional buyer status. The list now includes any institutional accredited investor that owns and invests on a discretionary basis a minimum of $100,000,000 in securities of unaffiliated issuers.

Learn more about recent changes from the SEC’s recent video here.

 

The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.