On August 26, 2020, the SEC adopted long-anticipated final rules expanding the definition of “accredited investor” under the Securities Act of 1933 (the “Securities Act”) as part of its ongoing effort to simplify, harmonize and improve the exempt securities offering framework. The adopted rules amend Rule 501(a), Rule 215 and Rule 144A and will become effective 60 days after their publication to the Federal Register, which is expected to occur during the fourth quarter of 2020.

Summary of Amendments

The “accredited investor” definition is the primary test of the Securities and Exchange Commission (SEC) and state regulators to determine what investors they deem eligible to participate in private offerings conducted under exemptions and safe harbors from registration under the Securities Act and state registration requirements.

Currently, the definition of “accredited investor” set forth in Rule 501(a) includes (1) certain banks, broker- dealers, insurance companies, investment companies and employee benefit plans; (2) private business development companies; (3) 501(c)(3) corporations; (4) directors and officers of the issuer; (5) individuals whose net worth exceeds $1 million or whose income exceeds $200,000; (6) any trust with total assets in excess of $5 million that is not formed for the purpose of acquiring the securities offered; and (7) any entity owned by accredited investors. 

The amendment expands categories of natural persons qualifying as accredited investors to include those who (1) possess certain professional certifications, designations or credentials issued by accredited educational institutions (to be designated by SEC order from time to time) (e.g., holders of Series 7, Series 65, and Series 82 licenses); or (2) are “knowledgeable employees” of a private fund, as defined in the Investment Company Act. 

The amendment also expands the list of entities qualifying as accredited investors to include (1) LLCs with at least $5 million in assets that are not formed for the purpose of acquiring the securities offered; (2) SEC- and state-registered investment advisers; (3) exempt reporting advisers; (4) rural business investment companies (RBICs); (5) entities that own “investments,” as defined by the Investment Company Act, in excess of $5 million that are not formed for the purpose of acquiring the securities offered; and (6) “family offices” and their “family clients” with at least $5 million in assets under management, as those terms are defined in the Investment Advisers Act of 1940.

Rule 215 was also amended to cross reference the definition of “accredited investor” in Rule 501(a). Rule 144A was amended to expand the definition of “qualified institutional buyer” to include (1) LLCs and RBICs that meet the $100 million in securities owned and invested threshold; and (2) any institutional investors that are accredited investors, if they satisfy the $100 million threshold.

Additional Information

This legal update is merely a summary of the final rules adopted by the SEC and does not purport to be a complete discussion of all rule changes. Complying with the SEC rules and regulations is a complex task within an ever-changing environment. If you have questions about the final rules discussed above, please contact your Kutak Rock attorney. 

SEC Amends Accredited Investor Definition