At the end of last year, the Securities and Exchange Commission (SEC) offered amendments that would enlarge the definition of accredited investor given in Regulation D, Rule 501(a). The submitted amendments would provide many more investors the ability to opt into private offerings by expanding the categories of persons who may qualify as accredited investors as a result of their professional experience, knowledge, or certifications. The proposed changes to the SEC accreditation requirements would also increase the number of entities that could qualify as accredited investors, enabling them to pass an investment test as opposed to an asset test, for qualification.
Professional Designations, Certifications, and Other Credentials
The amendments proposed by the SEC would institute an additional category for individuals to qualify for accredited investor status based on having certain professional designations, certifications, or credentials. These categories would indicate an understanding and background in certain areas of securities and investing. In order to qualify for accredited investor status, the individual would have to maintain these designations, certifications, or credentials in good standing.
Addition of Certain Entities
The proposed amendments to the SEC accreditation requirements would permit the following entities to become accredited investors:
• LLCs that fulfill other requirements of the accredited investor definition
• Investment advisers registered under various state laws
• Investment advisers registered under the Investment Advisers Act, Section 203
• Rural business investment companies
Knowledgeable Employees of a Private Fund
Certain knowledgeable employees of a private fund would be able to qualify as accredited investors for purposes of investing in the fund.
Family Clients and Offices
A new category added to the accredited investor definition as a result of the proposed amendments would include family offices that have $5 million minimum in assets under management and including its family clients – all of which is defined in Investment Advisers Act Rule 202(a)(11)(G)-1, the family office rule.
Special Clarifying Amendments
The proposed amendments to the SEC accreditation requirements would include the term “spousal equivalent” in the accredited investor definition for the calculation of net worth according to Rule 501(a)(5) and joint income according to Rule 501(a)(6). This change would allow both spouses and spousal equivalents to pool their finances in order to qualify as accredited investors.
Qualified Institutional Buyers(QIB)
A non-exclusive safe harbor exemption from Securities Act registration requirements regarding resales of particular restricted securities to QIBs is provided through Rule 144A.
The proposed amendment changes as listed above would provide an expanded opportunity for many more individuals and entities to enter the accredited investor arena.