On August 26, 2020, the Securities and Exchange Commission significantly expanded the category of persons who can be considered an “Accredited Investor” under Regulation D.
While the amendments do not change the $200,000.00/$300,000.00 annual income and $1,000,000.00 net asset thresholds for individuals (which have remained unchanged since Regulation D’s adoption), they update Regulation D’s definition of Accredited Investor in light of current realities as follows.
A new definition of “spousal equivalents” was added. Spouses are now permitted to include the joint income and joint net worth of “spousal equivalents”. The amended rule allows an investment to be purchased by one individual and need not be purchased jointly with the spousal equivalent.
The SEC added natural persons with certain professional designations and credentials. Initially this includes individuals who hold the following professional licenses – FINRA Series 7, FINRA Series 82, and FINRA Series 65. Professional groups such as the American Institute of CPA’s and the American Bar Association will likely now ask the SEC for designation of members of those professions as accredited investors by dint of their professional certifications and designations.
A Limited liability company can be an accredited investor if all of its members are accredited investors or if it t has total assets in excess of $5,000,000.00, and was not formed for the specific purpose of acquiring the securities being offered (even if not all of its members are accredited investors).
Additional categories of accredited investors now include natural persons who are “knowledgeable employees of a private fund” and are investing in the private fund. This new definition is limited to private funds. The current rule allows directors or executive officers of the entity to invest in the entity but does not include knowledgeable employees.
A new category of accredited investors covers an entity that owns investments in excess of $5,000,000.00 but was not formed for the specific purpose of acquiring the securities being offered, and is not covered by the other subsections of Rule 501. Note that this test is an “investment” based test rather than an “asset” based test.
Certain “family offices” with $5,000,000.00 in assets under management, not formed for the specific purpose of acquiring the securities being offered, and “family clients” as defined in the Investment Advisers Act of 1940 are now deemed accredited investors.
Certain changes were made to certain related SEC rules including the definition of “Qualified Institutional Buyer” under Rule 144A and “Institutional Accredited Investors” under Exchange Act Rule 15 8-1.
The amendments will be effective on December 8, 2020. A revised accredited investor questionnaire will be available from our firm.
Hopefully, state regulators will adopt, where necessary, amended regulations for the definition of “Accredited Investor” for compliance with state “Blue Sky” laws, which will follow the revised SEC guidelines.
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