Monthly Archives: September 2020

Expanded Accredited Investor Definition FAQs

Frequently Asked Questions About New Accredited Investor Definition

There has been much discussion about the recent amendments to the “accredited investor” definition adopted on August 26, 2020 (the “Amendments”) by the Securities and Exchange Commission (“SEC”). We have provided a more detailed overview of all the Amendments here, but wanted to address many of the common questions we are receiving from clients specifically regarding the Amendments to the accredited investor definition. Please send us any other questions and we will update the below as they come in…


Will a person who is a contractor to the management company or fund qualify as an accredited investor now?

The Amendments provide that a “knowledgeable employee” (as defined in Rule 3c-5(a)(4) of the Investment Company Act of 1940) of a 3(c)(1) or 3(c)(7) fund will now be considered an accredited investor. We have been asked by a few clients whether this expanded definition includes contractors. Because the definition of a knowledgeable employee does not include contractors and has not been altered by the Amendments or otherwise, contractors do not currently qualify as accredited investors under this expanded definition.

What about the professional certification designation?

A natural person holding at least one professional certification or designation or credential in good standing from a qualifying educational institution will now be considered an accredited investor.

To determine whether an investor meets this criteria, the SEC will consider: (i) whether the certification, designation or credential results from an examination or series of examinations administered by a self-regulatory organization, other industry body or accredited educational institution; (ii) whether the examination(s) are reliably designed to demonstrate an individual’s comprehension and sophistication in the areas of securities and investing; (iii) whether an investor obtaining such certification, designation or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and (iv) whether it is publicly made available by the self-regulatory organization or other industry body (or is otherwise independently verifiable) that an investor holds the certification, designation or credential.

The professional certifications, designations or credentials currently recognized by the SEC to satisfy this criterion will be posted on the SEC’s website. One important item to note is that an investor does not need to practice in the field(s) related to the certification, designation or credential to meet the good standing requirement, except to the extent that continued affiliation with a firm is required to maintain such certification, designation or credential.

What has prompted this modernization of the accredited investor definition?

Whether an investor meets the definition of an accredited investor has been one of the most important considerations when determining whether an investor is eligible to invest in private capital markets. The primary purpose of this qualification has been to determine whether an investor based solely on an investor’s income or net worth (because they presumably would be able to withstand a loss in the investment). The effects of the limited tests have prevented many investors from partaking in private capital markets, regardless of their actual financial sophistication. Thus, after years of discussions, the SEC has expanded the accredited investor definition to provide new measures of determining financial sophistication that more holistically determine financial sophistication. These Amendments should decrease the economic barrier-to-entry in our private capital markets and result in the participation of newly qualified accredited investors with more diverse backgrounds.

When do the Amendments become effective?

The Amendments will become effective 60 days after publication in the Federal Register. As of the date we are posting this FAQ, the Amendments have not yet been posted to the Federal Register.

What kind of legal documents need to be updated to reflect the Amendments?

The accredited investor definition is used in many different legal documents in many different contexts so the the exact document that will need to be revised or updated will depend on the facts of the situation.

In the private fund context, the Amendments will generally only trigger necessary updates to the private fund subscription documents. While the “old” language is still accurate, it does not encompass all potential accredited investor categories so the language could still be used once the Amendments are effective but will not encompass all categories of potential accredited investor.

Once the Amendments are posted to the Federal Register, we will reach out to our clients to discuss updating their subscription documents.

Do the Amendments change the type of investor a California Exempt Reporting Adviser (“CA ERA”) may charge performance fees from?

No. The private fund adviser exemption in California, which is available only to advisers who provide advice solely to “qualifying private funds”, only permits CA ERAs to charge performance fees to “qualified clients”, as defined in the Investment Advisers Act of 1940. The Amendments do not change this limitation.


Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact us.

Recap of Crypto Discussion Forum

On September 2nd we held our crypto discussion forum where we discussed legal, tax and compliance issues related to the digital asset space. The below is a quick recap the event from panelist Justin Schleifer of Aspect Advisors. We’ll keep updating everyone through this blog on future events as well.


Thank you for attending our “Cryptocurrency and Digital Asset Forum: Trends in Legal, Tax, and Compliance” webinar last week. I would also like to extend many thanks to my fellow panelists, Ryan David Williams of Ashbury Legal and Nick Cerasuolo of Blockchain Tax Partners, and to Bart Mallon of Cole-Frieman & Mallon for hosting.

We had a very interesting and lively interactive discussion about putting crypto investments to work through yield and lending, and DeFi implications including market-making, governance and custody issues.

Here are my favorite tidbits from the various speakers:

Each state has their own regulations as well, and everyone is on different parts of the learning curve. People have to address the nuances of each individual state. States may not agree with the idea of a custodian. DeFi is just way out there for them. They’re still on this idea of what is a custodian in the crypto space? Just getting over that hurdle has proven to be very difficult. – Bart

With the advent of crypto/blockchain, we almost went back in time because are used to dealing with USD. It’s obvious when something is taxable. Crypto took us back to the stone age where we’re back to barter model; property for property (BTC for ETH). You have transactions that don’t involve fiat at all. Tax event triggers are traps for the unwary. It’s not always obvious when a transaction is taxable. – Nick

Insider trading is absolutely an issue in this industry, and it’s getting more nuanced. Firms in the venture capital space get involved with companies on working on their protocols and Dapps. You can very well come in contact with all types of MNPI, so both sides must evaluate what is material or public. You have to restrict yourself in certain areas and not commit to certain trading activities. – Justin

There was a fantasy that once you achieve decentralization, laws are gone. This is an ethos that a decentralized exchange doesn’t need KYC/AML. We are now dispelled of that notion (i.e. the SEC went after the founder of a crypto exchange). The CFTC has also said they will go after software developers. This is the concept of causing a violation of securities law. The expectation of profits is based on the efforts of others. The manager is doing all the work, but what do we do when there is no sponsor and the work is done by community participants? We haven’t finalized this yet. ETH is officially decentralized, so it doesn’t make sense to apply traditional securities laws. – Ryan

If you (or your friends or colleagues) would like to review any of the webinar content, please email Amanda Brown for a link to the recording. If you have any questions about any of the above topics, please reach out to any of our panelists.

We hope you enjoyed this event and if you have any feedback, we would love to hear from you. We look forward to seeing you at our next event!

Best regards, Justin Schleifer


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon LLP has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. If there are any questions on this post, please contact Mr. Mallon directly at 415-868-5345.

Crypto Discussion Forum Tomorrow!

Tax, Compliance and Legal for the Digital Asset Space – Ask Your Questions

Tomorrow, September 2nd, at 10am PT we will be hosting an open question and answer discussion forum on issues affecting the digital asset space. We have a number of interesting topics to explore from the legal, tax and compliance side including:

  • Yield and lending trends and consequences
  • DeFi, DeFi, DeFi
  • Market Making
  • Custody
  • Regulatory update and what this means for different groups (managers, stakers, custodians, etc)

Speakers include:

  • Bart Mallon, Cole-Frieman & Mallon
  • Ryan David Williams, Ashbury Legal
  • Justin Schleifer, Aspect Advisors
  • Nick Cerasuolo, Blockchain Tax Partners

To register for forum, please go here.

To submit a question, please go here

Look forward to seeing you then!


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.