On August 26, 2020, the Securities and Exchange Commission adopted amendments to its definition of “accredited investor”, one of the primary prerequisites to participating in private capital markets. Historically, “accredited investors” were defined solely by an investor’s income and/or net worth, without regard to the investor’s acumen or sophistication. Thus, even sophisticated and experienced investors capable of weighing the relevant risks and rewards of investment opportunities were prohibited from investing in private capital markets simply because they did not meet certain financial benchmarks. However, with its expanded definition, the SEC has opened the door to these knowledgeable investors to participate in private markets, irrespective of their income and net worth, based on defined measures of professional knowledge, experience or certifications.
Now, in addition to the unchanged income/net worth thresholds, Rule 501(a) and Rule 215 of the Securities Act have been amended to expand the definition of “accredited investor” to include the following:
- holders in good standing of the Series 7, Series 65, and Series 82 licenses (the SEC also developed a procedure for adding more qualifying professional credentials in the future);
- with respect to investments in a private fund, individuals who are “knowledgeable employees” of the fund;
- limited liability companies with $5 million in assets (including SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies);
- any entity that owns “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- “family offices” with at least $5 million in assets under management, and their “family clients,” as each term is defined under the Investment Advisers Act; and
The amendments also add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendments offer a reasonable modernization of the “accredited investor” definition by providing objectively qualified individuals and institutions the opportunity to participate in private markets, even if they fail to meet a certain stated net worth. The revisions also enable the SEC to reevaluate or expand on qualifying credentials, offering it a flexibility that was not afforded under the prior definition.
If you have any questions or would like additional information regarding this development, please contact any one of the following partners at Winget Spadafora & Schwartzberg, LLP who are leading the firm’s effort in the representation of broker-dealers, financial advisors and investment advisers across the United States.