SEC Expands Definitions of Accredited Investor and Qualified Institutional Buyers
September 4, 2020
On August 26, 2020, the SEC adopted a final rule updating the definition of an “accredited investor” in Rule 501(a) under the Securities Act, and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act. The amended rule will expand who is eligible to participate in private capital markets. Under the current rule an accredited investor, with certain exceptions, is defined by specific income or net worth tests, and did not take into account an investor’s financial sophistication. The amendment to Rule 501(a), among other things:
- adds a new category that permits natural persons who hold certain professional certifications, such as holders of Series 7, Series 65 and Series 82 licenses, to qualify as an accredited investor. The SEC, by order, may designate other professional certifications, designations or credentials;
- with respect to investment in a private fund, accredited investors includes natural persons who are “knowledgeable employees” of the fund;
- clarifies that limited liability companies with $5 million in assets may be an accredited investor, and added SEC and state registered investment advisors, exempt reporting advisors, and rural business investment companies (RBICs) to the list of entities that may qualify;
- added 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 were not formed for the specific purposes of investing in the securities offered;
- adds “family offices” with at least $5 million in assets under management and their “family clients” as the terms are defined under the Investment Company Act; and
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purposes of qualifying as accredited investors. A spousal equivalent is defined as “a cohabitant occupying a relationship generally equivalent to that of a spouse.”
In addition, the SEC amended the definition of “Qualified Institutional Buyer” in Rule 144A of the Securities Act. The new definition adds RBICs and LLCs to the definition if they meet the $100 million securities owned and invested threshold. Qualified Institutional Buyer now also includes institutions that are accredited investors if they satisfy the $100 million securities owned and invested threshold. The SEC also added a note clarifying that entities seeking QIB status under the new rule may be formed for the purpose of acquiring the securities being offered.
The amendments will become effective 60 days from publication of the final rule.
The new rules expand the eligibility to participate in the private capital markets. If you are interested in raising capital through a private placement of securities or seek to invest in securities offered through a private placement memorandum, the corporate attorneys at Rothman Gordon are ready to assist. You may contact us online or call (412) 338-1100.