On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) expanded the definition of “Accredited Investor” for purposes of exempt private offerings under Regulation D to include new categories of individual and corporate investors.
For private offerings claiming exemption from registration under the securities laws, the SEC greatly restricts sales to non-Accredited Investors by limiting any such offering sales to no more than 35 such investors and imposing extensive disclosure obligations. These requirements remain unchanged under the amended rules. More than $1.5 trillion was raised through Regulation D offerings in 2019, so the expanded Accredited Investor definition could have a significant overall impact on capital raising. However, its effect in specific capital markets, such as equity financings for emerging companies, remains uncertain.
The definition of Accredited Investor previously applied only to investors who meet certain net worth and income requirements: (i) for individuals, an annual income for the past two years of $200,000 ($300,000 for married couples) or $1 million net worth (excluding the value of a primary residence) and (ii) for organizations, assets of $5 million or status as a bank or other specified entity. The revised definition now includes investors who do not satisfy these monetary requirements, based on their presumed financial sophistication.
The definition of Accredited Investor will now include the following, without regard to the net worth or income of any individuals or members:
- All holders in good standing of Series 7, 65, and 82 licenses (the SEC may add other qualifying certifications, designations, or credentials to the definition in the future);
- SEC or state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs);
- “Knowledgeable employees” of a private investment fund (only for investments in their employer’s investment fund);
- Limited liability companies with $5 million in assets not formed for the specific purpose of investing in the securities offered;
- Any entity, including Indian tribes, governmental bodies, funds, and foreign entities, that own “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; and
- “Family offices” with at least $5 million in assets under management and their “family clients” (as defined in the Investment Advisers Act).
In addition, “spousal equivalents” (including cohabiting couples) may also now pool their finances to qualify as Accredited Investors.
The definition for “Qualified Institutional Buyer” under Rule 144A has also been revised to conform with the new changes.
In June 2019, the SEC began soliciting comments about proposed changes to the SEC’s Accredited Investor definition, and the Final Rule was published on August 26. The new definition will go into effect in late October.
The information provided here does not constitute legal advice and the above summary of the SEC’s Final Rule is not a substitute for reading the specific provisions of the law. Prince Lobel’s Corporate Group is actively involved in advising on exempt private offerings. Contact us for guidance on how you and your business can best take advantage of the new Accredited Investor definition in your capital raising efforts.
If you would like additional information, please contact Robert Maloney Corporate practice group chair(firstname.lastname@example.org; 617-456-8008).