Under the SEC’s rules, many exempt private offerings are limited to accredited investors. For most investors, the primary way to qualify as an accredited investor is based on the investor’s annual income or net worth. An individual qualifies at $200,000 of annual income while a married couple qualifies with a combined income of $300,000. In addition, a net worth of $1 million or greater (excluding the equity value of a primary residence) will qualify for accredited investor status.
The recent amendments will expand the accredited investor definition to include certain individuals who may qualify based on “measures of professional knowledge, experience or certifications” in lieu of the income or net worth tests as well as expanding it to include certain other individuals and entities.
Professional Certifications, Designations and Other Credentials
The amendments add a new Rule 501(a)(10) which allows natural persons to qualify as an accredited investor based on certain professional certifications, designations, and other credentials. The SEC will publish a list of all qualifying certifications, designations, and credentials which will be recognized by the SEC on its website. As part of the adoption of the new rule, the SEC issued an order designating the following licenses as qualifying natural persons for accredited investor status, so long as the license holder is in good standing:
- Licensed General Securities Representative (Series 7).
- Licensed Investment Adviser Representative (Series 65).
- Licensed Private Securities Offerings Representative (Series 82).
Knowledgeable Employees of Private Funds
The SEC has also added a category to the definition of accredited investor in new Rule 501(a)(11) which will permit “knowledgeable employees” of private funds to qualify as accredited investors for the purpose of investing in the fund. A “knowledgeable employee” will be as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940, as amended. This will generally include an executive officer, director, trustee, general partner, advisory board member or person serving in a similar capacity for the fund as well employees (other than those serving solely clerical or administrative functions) who as part of their regular duties participate in the investment activities of the fund and have done so for at least 12 months.
Additional Qualified Entities
The amendments will expand the list of entities which qualify as an accredited investor to include:
- Investment advisers registered with the SEC or a state.
- Investment advisers exempt from registration under Section 203(l) or (m) of the Investment Advisers Act of 1940.
- Rural business investment companies.
- LLCs which (i) have total assets in excess of $5 million, and (ii) were not formed for the specific purpose of acquiring the offered securities.
- Any other entity which (i) owns investments in excess of $5 million, and (ii) were not formed for the specific purpose of acquiring the offered securities.
- Family offices and family clients, as defined in Rule 202(a)(11)(G)-1 under the Advisers Act, meeting the conditions of new Rules 501(a)(12) and (a)(13).
In addition, the SEC adopted amendments to the joint net worth or income thresholds in Rules 501(a)(5) and (a)(6) which will permit pooling of finances for “spousal equivalents,” which is defined as “a cohabitant occupying a relationship generally equivalent to that of a spouse.”