On August 26, 2020, the U.S. Securities and Exchange Commission (the “SEC”) published its Final Rule that amends the definition of “Accredited Investor” (for private placements pursuant to Regulation D) to “add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s ‘knowledgeable employee,’ expand the list of entities that may qualify as accredited investors, add entities owning $5 million in investments, add family offices with at least $5 million in assets under management and their family clients, and add the term ‘spousal equivalent’ to the definition.”[1] The stated purposes of the Final Rule is “to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933.”[2]
The amendments to the “accredited investor” definition added new categories for both natural persons and entities. For natural persons,[3] the SEC designated in a separate order (a) as the initial certifications, designations, or credentials, those natural persons holding in good standing the “General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65),” and (b) certain “knowledgeable employees” of private funds for investments in the funds.[4]
With respect to entities, the Final Rule amends the definition of “accredited investor” to include (a) all SEC and state-registered investment advisers, (b) exempt reporting advisers, (c) rural business investment companies, (d) any entity owning “investments,” and (e) certain “family offices” and their “family clients”.[5]
The SEC also now allows natural persons to include the joint income from spousal equivalents when calculating joint income Rule 501(a)(6) and to include spousal equivalents when determining net worth under Rule 501(a)(5) “Spousal equivalents” is defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.
Christopher W. Gerold, President of the NASAA, is critical of the Final Rule, as set forth in the following statement also issued on August 26:
“The Commission’s vote today continues its deregulatory campaign to expand private markets, while showing little regard for the potential adverse effects on investors and the public markets. The SEC should focus on growing and promoting the public markets rather than incentivizing issuers to raise capital in the private markets. Further expansion of private markets comes at the expense of the public markets, which are essential to the health of the economy.”
“The Commission squandered an opportunity to fulfill its mandate to protect investors by failing to address long overdue changes to the wealth and income standards defining accredited investors. For the past 38 years, the Commission’s failure to index these standards to account for inflation has eroded the investor protections they were designed to provide. Each year the Commission fails to address these standards only expands the pool of accredited investors, including investors who only meet the wealth standard based on their accumulated retirement savings. The Commission had the opportunity, but once again failed, to protect seniors or other vulnerable investors from the inherent risks associated with the lack of transparency and liquidity that exists in the private securities marketplace.”[6]
This Final Rule becomes effective 60 days after it is published in the Federal Register.
Author: Brian St. James
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[1] SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 230 and 240 (“Release Nos. 33-10824; 34-89669; File No. S7-25-19) RIN 3235-AM19 “Amending the “Accredited Investor” Definition.
[2] Id.
[3] Previously with respect to a natural person, s/he had to have (1) individual net worth, or joint net worth with that person’s spouse, at the time of purchase that exceeded $1 million, or (2) income or joint income with that person’s spouse that exceeds $200,000 or $300,000, respectively, in each of the two most recent years, and who has a reasonable expectation of reaching that same income level in the current year.
[4] 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.
[5] The definition encompasses a “family office” as defined in the “family office rule” [17 CFR § 275.202(a)(11)(G)-1] that meets the following additional requirements: (i) it has at least $5 million in assets under management, (ii) it is not formed for the specific purpose of acquiring the securities offered, and (iii) its prospective investment is directed by a person who has such knowledge and experience in financial and busines matters that such family office is capable of evaluating the merits and risks of the prospective investment. “Family clients” (as defined in the family office rule) of a family office must meet the requirements stated in (i), (ii), and (iii) above, whose prospective investment in the issuer is directed by the family office.
[6] https://www.nasaa.org/55611/nasaa-statement-on-the-secs-amendment-of-accredited-investor-definition/