August 26, 2020 — The Securities and Exchange Commission announced its amending of the definition of “accredited investor” to allow qualification to include specific measures in areas of experience, professional knowledge, and certification. This would also include possessing Financial Industry Regulatory Authority licenses, as well as the current income and net worth testing.
Expanding Participation for Investors and Tribal Governments
On Wednesday August 26, 2020, the Securities and Exchange Commission announced its amending of the definition of “accredited investor” to allow qualification to include specific measures in areas of experience, professional knowledge, and certification. This would also include possessing Financial Industry Regulatory Authority licenses, as well as the current income and net worth testing.
Specifically, the following accredited investor definitions are now more inclusive for Natural Persons:
● Spousal Equivalents where the pooling of finances can qualify under income testing to be considered as an accredited investor, even if securities are purchased separately or jointly
● Persons Holding Certain Professional Certifications may have an investment adviser representative license, a general securities representative license, or another type of expert certification attesting to the individual’s investment knowledge.
● Knowledgeable Employees involve an affiliated employee of a covered fund that is part of investing tasks for at least 12 months.
Qualifying Entities
The new legislation also increased the list of qualifying entities, as well as making allowances for entities that meet required investment testing. This is exciting news for tribal entities who will now have the ability to qualify for participation in private offerings.
Specifically, the below entities have expanded definitions to qualify for accredited investor consideration:
● Investment, exempted mid-size private fund, and venture capital reporting advisers registered with their state or the SEC that fall under the 1940 Invest Adviser Act
● Family clients that are part of qualified family offices
● Family offices not formed for the acquisition of securities with $5 million in assets that is under the direction of a knowledgeable individual in finance and/or business
● LLCs not formed for acquiring offered securities with $5 million in assets
● Other entities not formed for acquisition of offered securities that are not subject to the current rule and have $5 million in defined investments under the Investment Company Act of 1940
The primary goal of these expanded definitions is to create a larger benefit for private funds to gain additional investors that normally do not meet requirements for consideration as accredited investors.
Why the Amendments Were Considered
Before the recent amendments, investment experts had pointed out for many years that using net worth thresholds and income would not necessarily capture investors with appreciable knowledge. This framework also did not attract individuals who could properly evaluate and invest in private offerings unless protections were provided by the registration.
Since the Commission requested public input regarding its Concept Release on Harmonization of Securities Offering Exemptions, in June 2019, it has been working towards an improved exempt offering process that would expand investment participation without sacrificing investor protection. This approach should help promote capital formation and help reduce wealth-based barriers barring qualified Americans wishing to invest from doing so.
This new rule became effective December 8, 2020.
For more information, read the SEC’s explanation and consider contacting a knowledgeable lawyer from Polymath Legal PC by calling (833) 931-6418.