September 1, 2020
On Aug. 26, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. This amendment significantly expands what persons and entities may qualify as “accredited investors” under Rule 501(a) of Regulation D of the Securities Act of 1933.
Under the federal securities laws, a company that offers or sells its securities must register its securities with the SEC or rely on an exemption from the registration requirements. Many such exemptions, including Rule 506 of Regulation D, permit a company to sell its securities to “accredited investors”, a term that is defined in Rule 501 of Regulation. An “accredited investor” generally refers to investors with enough financial sophistication so as to have a reduced need for the protections provided by regulatory disclosure filings.
In a press release, the SEC stated that purpose of the amendment was to update and improve the definition of accredited investor to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. The amendment accomplishes this purpose by expanding the definition of an accredited investor in Rule 501 (a) in the following ways:
1. It adds new categories allowing natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7 (licensed general securities representative), Series 65 (licensed investment adviser representative), and Series 85 (licensed private securities offerings representative) licenses, or other credentials issued by an accredited educational institution;
2. It includes as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
3. It clarifies that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
4. It adds a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “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;
5. It adds “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
6. It adds 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.
Additionally, the amendments expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and rural business investment companies (“RBIC”) if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.
A copy of the amendment can be found in its entirety at https://www.sec.gov/rules/final/2020/33-10824.pdf.
Implications for Companies
The amendments should provide companies additional access to capital investment by an expanded definition of exempt offerings. However, with the changes to the definition of accredited investor, companies who are issuers of securities in private offerings will need to update their accredited investor and QIB questionnaires for future offerings. This applies to all privately held companies, private equity, venture capital, and hedge funds.
Should you have any questions regarding this new rule, or any other exemption rules, please feel free to reach out to one of our attorneys. Conroy Baran is Kansas City and Joplin based corporate law firm that focuses on assisting its clients with their day-to-day corporate needs, as well as mergers, acquisitions, sales, reorganizations (including Chapter 11), succession planning, intellectual property, and securities needs.
Kyle Conroy: 816-388-9686
Robert Baran: 816-616-5009
Larry Pittman: 816-210-9680
Christopher Stewart: 816-522-1582
Andrew Potter: 719-359-2701
Bob Reynolds: 417-496-2467