New definition to be effective before end of year

On August 26, 2020, the SEC Commissioners voted to adopt amendments to expand the definition of “accredited investor” and “qualified institutional buyer”. Historically the test for accredited investor status was only based on a person’s income or net worth but has now been expanded in a limited fashion to include persons with certain financial designations. The amendments will become effective 60 days after publication in the Federal Register, which is expected within 1-2 weeks. Below we have highlighted the applicable updates and we will continue to provide information on this topic as it develops.

For more information, please also see the SEC Press Release and Fact Sheet.

Accredited Investor Definition Update

Individuals

With respect to individuals, the following will now also be accredited investors:

(1) individuals with certain qualifying professional certifications, designations and other credentials (currently includes Series 7, Series 65, and Series 82 licensed individuals); and

(2) individuals who are “knowledgeable employees” (which expands the definition from only certain directors, executive officers, etc).

For individuals, the amendments also clarify that natural persons may include the income from “spousal equivalents” for the purposes of calculating joint income and net worth. “Spousal equivalent” is generally defined as a cohabitant occupying a relationship generally equivalent to that of a spouse. 

Entities

With respect to entities, the following will now also qualify as accredited investors:

(1) SEC and state-registered investment advisers;

(2) rural business investment companies;

(3) limited liability companies with total assets in excess of $5 million and not formed for the specific purpose of acquiring the securities offered;

(4) entities owning “investments,” as defined in Rule 2a51-1(b) of the Act, in excess of $5 million [note: the intent of this category (4) entities meeting an investments-owned test is to include Native American tribes and other federal, state, territorial, and local government bodies within the accredited investor definition]; and

(5) family offices with at least $5 million in assets under management and their family clients.

Qualified Institutional Buyer Definition Update

Along with the accredited investor update, the definition of “qualified institutional buyer” in Rule 144A will be updated to include entities and any institutional investors that meet the $100 million in securities owned and invested threshold. The scope of the new amendments include Native American tribes, governmental bodies, and bank-maintained collective investment trusts.  

Conclusion

While these changes are incremental rather than radical, they are a step in the right direction and hopefully portend further expansion of the definition to allow greater access to the private capital markets. Those parties (investment managers and private placement sponsors) who want to take advantage of the expanded definition will need to speak with legal counsel about updating applicable subscription documents. We will be providing further updates on timing and other matters as they develop.

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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.