SEC Adopts Amendments to Update Accredited Investor and Qualified Institutional Buyer Definitions

The Securities and Exchange Commission on August 26, 2020 adopted amendments to the definition of “accredited investor” to: add new categories of investors (both for individuals and entities); codify longstanding SEC staff interpretations; and make conforming changes to the definition of “qualified institutional buyer” under Rule 144A.¹ In its press release, the SEC noted that the amendments are intended to improve these definitions to “more effectively identify institutional and individual investors that have the knowledge and expertise” to participate in offerings not registered under the Securities Act of 1933.

This Newsflash provides a brief overview of the amendments. An upcoming Dechert OnPoint will provide further analysis of these amendments.

New Categories of Individual Accredited Investors

The amendments add the following categories of natural persons to the definition of accredited investor:

• Individuals with Professional Certifications/Designations and Other Credentials. The amendments add natural persons in good standing who hold certain professional certifications, designations or credentials from accredited educational institutions designated by the SEC. The SEC’s initial designations are individuals holding the Series 7, Series 65 and Series 82 licenses. The amendments provide a framework by which the SEC may designate additional certifications, designations or credentials going forward.
  
  
• Knowledgeable Employees of Private Funds. The amendments add knowledgeable employees (as defined under the Investment Company Act of 1940) as accredited investors for purposes of investing in related private fund offerings.
  
  
• Pooled Finances for Spousal Equivalents. The amendments allow the inclusion of income from spousal equivalents (i.e., a cohabitant occupying a relationship generally equivalent to that of a spouse) in determining the joint net worth and joint income thresholds contained in the accredited investor definition.

New Categories of Entity Accredited Investor

The amendments add the following categories of entities to the definition of accredited investor:

• Entities Satisfying a $5 Million “Investments-Owned” Test. The amendments add a new catch-all category for entities that own more than $5 million of investments (as defined under the 1940 Act). This category is specifically intended to capture all new and existing entity types not already contemplated by the accredited investor definition (including Indian tribes, governmental bodies, and entities formed under foreign jurisdictions, among others).
  
  
• Certain Family Offices and Family Clients. The amendments add family offices (as defined in the Investment Advisers Act of 1940): (i) with more than $5 million in assets under management; (ii) that are not formed for the purpose of investing in the offered securities; and (iii) whose prospective investments are directed by individuals who have knowledge and experience in financial and business matters. The amendments also add family clients (as defined in the Advisers Act) of qualifying family offices.
  
  
• SEC- and State-Registered Investment Advisers and Exempt Reporting Advisers. The amendments add investment advisers that are registered with the SEC or a state, as well as exempt reporting advisers.
  
  
• Limited Liability Companies with Total Assets Exceeding $5 Million. The amendments add limited liability companies having total assets exceeding $5 million, codifying a long-standing staff position that limited liability companies otherwise satisfying the requirements of the accredited investor definition qualify as accredited investors.

Conforming Amendments to the Qualified Institutional Buyer Definition

The amendments make certain conforming changes to Rule 144A (which provides a safe-harbor for certain resales of restricted securities to qualified institutional buyers from the registration requirements of the Securities Act), including a new catch-all category for entities that are institutional accredited investors (as defined in the Securities Act) that are not any of the types of entities expressly included in Rule 144A and which otherwise own and invest on a discretionary basis $100 million or more of assets in issuers that are not affiliated with the entity. In response to comments solicited by the SEC in its 2019 Concept Release on Harmonization of Securities Offering Exemptions,² the SEC added a new instruction clarifying that an entity formed for the purpose of acquiring 144A securities is eligible to be a qualified institutional buyer.

The amendments will go into effect 60 days after publication in the Federal Register.

Footnotes

1) Amending the “Accredited Investor” Definition, Rel. No. 33-10824 (August 26, 2020) (Adopting Release).

2) Concept Release on Harmonization of Securities Offering Exemptions, Rel. No. 33-10649 (June 18, 2019). For further information, please refer to Dechert OnPoint, SEC Proposes Amendments to Update Accredited Investor and Qualified Institutional Buyer Definitions.