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Do you meet the definition of an “Accredited Investor” under the new SEC Rules?

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Are you an Accredited Investor or a Non-Accredited Investor?

There are two classes of investors for the purposes of a Regulation D Offering: Accredited Investors (AIs) or Non-Accredited Investors (Non-AIs).  The U.S. Securities and Exchange Commission (SEC) recently amended the AI Definition in 17 CFR 230.501 (Rule 501) of the Securities Act, effective December 8, 2020 (new Rules).  It is possible that the new Rules qualify you as an AI and you can start investing in exempt offerings that were previously inaccessible to you.

Why should I care about the new SEC rules?

The new SEC rules expanded the AI definition to facilitate capital formation by expanding the pool of investors in exempt offerings. AIs are presumed to be financially sophisticated and capable of fending for themselves in evaluating investments. The following chart shows how much capital was raised in 2019 under some important exemptions:

ExemptionAmounts Reported or Estimated as Raised in 2019
Rule 506(b) of Regulation D$1.492 Trillion
Rule 506(c) of Regulation D$66 billion
Regulation A: Tier 1$0.044 billion
Regulation A: Tier 2$0.998 billion
Rule 504 of Regulation D$0.228 billion
Regulation Crowdfunding$0.062 billion
Table 4, page 108 of SEC Release

Who is included in the amended AI Definition?

Natural Persons

Natural Persons Holding Professional Certifications and Designations or Other Credentials

The SEC designated the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65) as the initial certifications, designations, or credentials designated by the SEC under Rule 501(a)(10).  Natural persons must hold their certifications or designations in good standing.  The SEC may designate qualifying professional certifications, designations, and other credentials by order, with such designation to be based upon consideration of all the facts pertaining to a particular certification, designation, or credential.

Knowledgeable Employees of Private Funds

“Knowledgeable employee” is defined in Rule 3c-5(a)(4).  It includes, among other persons, trustees and advisory board members, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund’s investments, as well as employees of the private fund or the affiliated person of the fund (other than employees performing solely clerical, secretarial, or administrative functions) who, in connection with the employees’ regular functions or duties, have participated in the investment activities of such private fund for at least 12 months.

Permitting Spousal Equivalents to Pool Finances for the Purposes of Qualifying as Accredited Investors.

Spouses or spousal equivalents may pool their financial resources when calculating joint net worth which must exceed $1 million, excluding the value of the primary residence of such natural persons. There are no limitations on how an investor takes title to securities or how spouses or spousal equivalents own assets.  

A natural person who had an individual income in excess of $200,000 in each of the two most recent fiscal years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of the two most recent fiscal years and who has a reasonable expectation of reaching at least the same level of income in the current year.

Entities

  • Certain Registered Investment Advisers, Rural Business Investment Companies, Banks, Savings and Loan Associations, Broker Dealers, Insurance Companies, Investment Companies, and Employee Benefit Plans.
  • Limited Liability Companies, nonprofit organization, corporations, Massachusetts or similar business trusts and partnerships with assets in excess of $5 million and that were not formed for the specific purpose of acquiring the securities being offered.
  • Any entity owning “investments,” as that term is defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that is not formed for the specific purpose of acquiring the securities being offered.
  • A “family office” as defined in the “family office rule” pursuant to the Investment Advisers Act of 1940 that meets the following requirements: (1) it has more than $5 million in assets under management, (2) it is not formed for the specific purpose of acquiring the securities offered, and (3) its 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; including “family clients” (as defined in the family office rule) of a family office that meets the requirements stated in the previous sentence, whose prospective investment in the issuer is directed by such family office.
  • An entity where all equity owners qualify on their own merits as AIs, and even where an equity owner of an entity is another entity, so long as all equity owners of that entity are AIs, the entity will meet the AI definition.  For example, Entity A is owned by 4 AIs and an LLC, Entity B.  Entity B is owned by 3 AIs.  Entity A meets the AI definition

SEC Release Nos. 33-10824; 34-89669; File No. S7-25-19 can be read in its entirety here. Jennifer Zepralka, Office Chief,
Charlie Guidry, Special Counsel, Office of Small Business Policy, Jennifer Songer, Branch Chief, Lawrence Pace,
Senior Counsel, and the supporting staff explained the SEC’s careful consideration of the risks and benefits to key parties in the new SEC rules.

 This blawg is not legal advice and should not be relied upon as such. Please leave any questions or comments below!

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