SEC Broadens the Pool of Accredited Investors and Qualified Institutional Buyers
On August 26, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to the definition of “accredited investor” in Rule 215 and Rule 501(a) under the Securities Act of 1933 (the “1933 Act”), and adopted corresponding changes to the definition of “qualified institutional buyer” in Rule 144A under the 1933 Act. These amendments broaden the categories of investors who are eligible to participate in private offerings, in an effort “to simplify, harmonize, and improve the exempt offering framework under the [1933 Act] to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.” (SEC’s final rule release, Amending the “Accredited Investor” Definition).
The amendments will become effective 60 days after publication in the federal register.
Amendments to the Accredited Investor Definition
The “accredited investor” definition is a critical component of the Rule 506 offering exemption and plays an important role in other federal and state securities law contexts.
The amended definition of “accredited investor” in Rule 501(a) of the 1933 Act, as described in the SEC’s final rule release:
- incorporates the following two (2) additional categories of eligible natural persons:
- natural persons who hold in good standing certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution which the SEC may designate from time to time by order. In conjunction with the adoption of these amendments, the SEC specifically designated. The Series 7 license (General Securities Representative), the Series 65 license (Licensed Investment Adviser Representative) and the Series 82 license (Private Securities Offerings Representative) as the initial certifications, designations, and credentials.
- with respect to investments in a private fund, natural persons who are “knowledgeable employees” (as defined in Rule 3c-5(a)(4) under the Investment Company Act) of the fund.
- incorporates the following seven (7) additional categories of eligible entities:
- limited liability companies not formed for the specific purpose of investing in the securities offered, with assets in excess of $5 million;
- SEC-registered and state-registered investment advisers, regardless of asset size;
- SEC exempt reporting advisers (i.e., investment advisers relying on the exemption from registering with the SEC under Section 203(l) or (m) of the Investment Advisers Act of 1940 (the “Advisers Act”)), regardless of asset size;
- rural business investment companies (”RBICs”), as defined in Section 384A of the Consolidated Farm and Rural Development Act, regardless of asset size;
- any entity not otherwise specifically listed in Rule 501(a) that owns “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act) in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- a “family office” as defined in Rule 202(a)(11)(G)-1 under the Advisers Act (i) with assets under management in excess of $5 million, (ii) that is not formed for the specific purpose of acquiring the securities offered and (iii) whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment;
- a “family client,” as defined in rule 202(a)(11)(G)-1 under the Advisers Act of a family office meeting the foregoing requirements and whose prospective investment in the issuer is directed by such family office pursuant to prong (iii) above.
- adds the term “spousal equivalent” (defined as a cohabitant occupying a relationship generally equivalent to that of a spouse) to the accredited investor definition, such that spousal equivalents may pool their finances for the purpose of calculating the income and net worth tests in the accredited investor definition.
To ensure uniformity, the SEC also amended Rule 215 under the 1933 Act to replace the existing definition of accredited investor with a cross reference to the definition in Rule 501(a) under the 1933 Act, revised as reflected above. Rule 215 defines the term “accredited investor” for purposes of Section 4(a)(5) of the 1933 Act. Section 4(a)(5) of the 1933 Act provides an exemption for issuers for the offer and sale of securities to accredited investors if: the aggregate offering amount does not exceed $5 million; the issuer, or anyone acting on its behalf, does not engage in general solicitation or general advertising; and the issuer files a notice on Form D with the SEC.
Qualified Institutional Buyer
The definition of “qualified institutional buyer” in Rule 144A is intended to “identify a class of investors that can be conclusively assumed to be sophisticated and in little need of the protection afforded by the  Act’s registration provisions.” (See SEC’s final rule release, Amending the “Accredited Investor” Definition). A qualified institutional buyer generally must own and invest in the aggregate and on a discretionary basis at least $100 million in securities of issuers that are not affiliated with such qualified institutional buyer.
Rule 144A provides a non-exclusive safe harbor exemption from the registration requirements of the 1933 Act for resales of certain restricted securities to qualified institutional buyers. The SEC’s amendments to the definition of “qualified institutional buyer” in Rule 144A broaden the scope to include limited liability companies and RBICs that meet the threshold of owning and investing $100 million in securities contained in the definition. The amendments also add “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.” (SEC Press Release SEC Modernizes the Accredited Investor Definition)
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