SEC Amendment Expands the Scope of Who Qualifies as an ‘Accredited Investor’

On August 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the definition of an “accredited investor” in Rule 215 and Rule 501(a) of Regulation D under the Securities Act of 1933. The amendments added new categories, as summarized below, for both individuals and entities to qualify as an accredited investor in privately placed investment offerings. The amendments are expected to take effect in November 2020.

1. Individuals.
   1. The amendments add a new category for individuals who have certain professional certifications, designations, license or other credentials, which relate to understanding securities and investing. Under the amendment, the SEC has the authority and flexibility to reevaluate previously designated certifications and to add any new certifications that it deems appropriate for accredited investor status (subject to public comment and input). Therefore, an investor should be mindful of any alerts/orders from the SEC regarding any changes to the certifications, which will be posted on the SEC’s website.

Currently, the SEC has only provided an initial order on the following three FINRA certifications: (1) Series 7Series 65Series 82. Furthermore, the SEC is putting the burden on the issuer of the securities to “take reasonable steps to verify” the investor’s accredited investor status by using the FINRA BrokerCheck or the SEC’s Investment Adviser Public Disclosure database. Finally, the individual must be in good standing with their license or certification.

2. The amendment added a category for “knowledge employees” (as defined under Rule 3c-5(a)(4) of the Investment Company Act of 1940) of private funds for investment in such private fund sponsored by their employers.
3. The amendment also now permits the income of a spousal equivalent’s (as defined under the amendment as a cohabitant occupying a relationship generally equivalent to that of a spouse) to be included and aggregated in determining the joint net worth and joint income threshold of the investor.

2. Entities. The amendments expanded the categories of entities to the definition of accredited investor to include the following:

1. Any entity with total assets in excess of $5 million of investments and not formed for a specific purpose of making an investment in the securities being offered. This now includes limited liability companies, even though this was a long-standing position of the SEC to be included in the definition of an accredited investor.
2. SEC and state-registered investment advisers and exempt reporting advisors.
3. Rural Business Investment Company (as defined under Section 384A of the Consolidated Farm and Rural Development Act).
4. Family offices (as defined in the Investment Company Act of 1940) and their family clients with (i) at least $5 million in assets under management, (ii) not formed for the specific purpose of making an investment in the securities being offered, and (iii) whose prospective investment is directed by an individual who has such knowledge and experience in financial and business matters.

The amendments become effective 60 days after publication in the Federal Register, which will be approaching soon in November. Therefore, as a practical matter, questionnaires in investment packages, information on file for investors, and representation and warranties in form subscription agreements and purchase agreements should be updated to reflect the changes described above.

The Corporate Group at Levenfeld Pearlstein will continue monitoring developments, and we are available to help with necessarily updates and revisions to your investment documents. Please reach out with any questions.