Change Will Open the Private Securities Markets to More Participants
The Securities and Exchange Commission adopted amendments to the SEC rules which expand the definition of who will qualify as an “accredited investor.” Historically, individuals have been required to meet minimum requirements for either income ($200,000) or net worth ($1,000,000) before they can participate in private investment markets. According to the SEC’s press release announcing the change, the updates are intended to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in the private markets, even if they may not otherwise qualify under the income or net worth minimums.
The change in rules should be very helpful to small business capital formation, permitting capital raises from a broader range of outside investors, regardless of the investor’s income or net worth, including knowledgeable employees of the company trying to raise the capital, family office investors, licensed securities brokers and investment advisors, and other professionals whose training or experience is deemed appropriate to make investment decisions.
As described in the SEC’s press release, the amendments:
- Add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution.
- Include holders in good standing of the Series 7, Series 65, and Series 82 licenses.
- Include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund.
- Clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify.
- Add 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 was not formed for the specific purpose of investing in the securities offered.
- Add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act.
- Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.