SEC defines Accredited Investor

The Secu­ri­ties and Exchange Com­mis­sion Wednes­day amend­ed its “accred­it­ed investor” def­i­n­i­tion to allow investors to qual­i­fy based on defined mea­sures of pro­fes­sion­al knowl­edge, expe­ri­ence or cer­ti­fi­ca­tions — includ­ing hold­ing cer­tain Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty licens­es — in addi­tion to the exist­ing tests for income or net worth.

The 166-page amend­ments adopt­ed Wednes­day also expand the list of enti­ties that may qual­i­fy, includ­ing by allow­ing any enti­ty that meets an “invest­ments test.”

“For the first time, indi­vid­u­als will be per­mit­ted to par­tic­i­pate in our pri­vate cap­i­tal mar­kets not only based on their income or net worth, but also based on estab­lished, clear mea­sures of finan­cial sophis­ti­ca­tion,” said SEC Chair­man Jay Clay­ton, in a state­ment. “I am also pleased that we have expand­ed and updat­ed the list of enti­ties, includ­ing trib­al gov­ern­ments and oth­er orga­ni­za­tions that may qual­i­fy to par­tic­i­pate in cer­tain pri­vate offer­ings.”

The com­mis­sion stat­ed that the amend­ments to the final rule are part of its “ongo­ing effort to sim­pli­fy, har­mo­nize, and improve the exempt offer­ing frame­work, there­by expand­ing invest­ment oppor­tu­ni­ties while main­tain­ing appro­pri­ate investor pro­tec­tions and pro­mot­ing cap­i­tal for­ma­tion.”

SEC Com­mis­sion­er Hes­ter Peirce tweet­ed Wednes­day “Amer­i­cans shouldn’t have to ask the SEC for per­mis­sion to invest, but today’s accred­it­ed investor rule at least offers peo­ple a path to ask per­mis­sion based on their edu­ca­tion, rather than sim­ply telling them ‘no, unless you’re rich.’”

In the case of indi­vid­u­als, “the pre­vi­ous rule used wealth — in the form of a cer­tain lev­el of income or net worth — as a proxy for finan­cial sophis­ti­ca­tion,” the SEC states. How­ev­er, “we do not believe wealth should be the sole means of estab­lish­ing finan­cial sophis­ti­ca­tion of an indi­vid­ual for pur­pos­es of the accred­it­ed investor def­i­n­i­tion. Rather, the char­ac­ter­is­tics of an investor con­tem­plat­ed by the def­i­n­i­tion can be demon­strat­ed in a vari­ety of ways.”

The thresh­olds stand at a net worth of at least $1 mil­lion exclud­ing the val­ue of pri­ma­ry res­i­dence, or income at least $200,000 each year for the last two years (or $300,000 com­bined income if mar­ried).

Accord­ing to the SEC, the amend­ments to the accred­it­ed investor def­i­n­i­tion in Rule 501(a):

• add a new cat­e­go­ry to the def­i­n­i­tion that per­mits nat­ur­al per­sons to qual­i­fy as accred­it­ed investors based on cer­tain pro­fes­sion­al cer­ti­fi­ca­tions, des­ig­na­tions or cre­den­tials, includ­ing the Series 7, Series 65, and Series 82 licens­es as qual­i­fy­ing nat­ur­al per­sons. (The Com­mis­sion will reeval­u­ate or add cer­ti­fi­ca­tions, des­ig­na­tions or cre­den­tials in the future);
• include as accred­it­ed investors, with respect to invest­ments in a pri­vate fund, nat­ur­al per­sons who are “knowl­edge­able employ­ees” of the fund;
• clar­i­fy 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);
• add a new cat­e­go­ry for any enti­ty, includ­ing Indi­an tribes, gov­ern­men­tal bod­ies, funds, and enti­ties orga­nized under the laws of for­eign coun­tries;
• add “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
• 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 also expand the def­i­n­i­tion of “qual­i­fied insti­tu­tion­al buy­er” in Rule 144A to include LLCs and RIBC pro­grams 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,” the SEC said, pro­vid­ed they sat­is­fy the $100 mil­lion thresh­old.