SEC Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

SEC Updates Definition of Accredited Investor

September 16, 2020 By Rick Randel

Most of us have heard the term “accredited investor”. Being accredited gives an investor access to a wider array of potential investments, because many of the exemptions from SEC registration are available only to offerings to accredited investors. The SEC recently amended the definition of accredited investor by:

Adding new categories of individuals to the definition of accredited investor.
Expanding the list of business entities that qualify as an accredited investor.
Adopting other modifications to the accredited investor definition and related rules.

New Categories of Individuals

Previously only directors, executive officers, or general partners of the issuer, and investors with a net worth of $1,000,000 or annual income of $200,000, qualified as accredited investors (interestingly, although there have been calls to adjust for inflation the dollar amounts that qualify an individual as an accredited investor, those dollar amounts were left unchanged).

The amendments added additional categories of individuals who qualify as accredited investors, including people who hold certain professional certifications. Only certifications specifically designated as qualifying by an SEC order will qualify. A list of all certifications, designations, and credentials recognized by the SEC as qualifying will be published on the SEC’s website. Initially, the following certifications qualify an individual as an accredited investor:

Licensed General Securities Representative (Series 7).
Licensed Investment Adviser Representative (Series 65).
Licensed Private Securities Offerings Representative (Series 82).

The SEC is expected to designate additional certifications, designations, and other credentials in the future.

The SEC also added “knowledgeable employees” of private funds to the definition of accredited investor for the purposes of investing in the fund they work for.

Additional Types of Business Entities

The SEC expanded the list of business entities that qualify as an accredited investor to include:

Most registered investment advisers.
Limited liability companies (LLCs) and other noncorporate entities that:
- have total assets in excess of $5 million; and
- were not formed for the specific purpose of acquiring the securities being offered.
Family offices and family clients that meet certain conditions.

Other Amendments

The SEC made the following additional changes to the definition of accredited investor:

Spousal Equivalents. For the purposes of pooling finances to qualify as accredited investors under the joint net worth or annual income tests, the SEC added the term “spousal equivalent” and defined it as “a cohabitant occupying a relationship generally equivalent to that of a spouse.”

Joint Net Worth. The calculation of “joint net worth” can now aggregate the net worth of an investor and his or her spouse or spousal equivalent, but the securities being purchased by an investor relying on the joint net worth test need not be purchased jointly.

Entity with Accredited Owners. While a business entity has always qualified as an accredited investor if all of its equity owners are accredited investors, the SEC has now clarified that, in determining accredited investor status, one may look through forms of equity ownership to natural persons.

I hope these changes allow you or some of your clients to invest in companies they may not have previously been able to. Feel free to contact me if you have any questions.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

SEC Opens Door to Equity Crowdfunding

December 10, 2015 By Rick Randel

For years, companies and project promoters have solicited donations and other forms of contributions through crowdfunding (think Indiegogo or Kickstarter). But they have not been able to sell stock through crowdfunding (sometimes called “equity crowdfunding”) because the securities laws forbade it. Then came the JOBS Act, Title III of which instructed the SEC to adopt rules to allow equity crowdfunding.

On October 30, 2015, the SEC adopted those rules in what they called “Regulation Crowdfunding”. Regulation Crowdfunding permits the following:

A company may raise up to $1 million per year through crowdfunding;
Any individual may invest up to the following amounts in once company per year:
- If annual income or net worth is less than $100,000, the greater of:
  - $2,000 or
  - 5 percent of the lesser of their annual income or net worth.
- If both annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth;
- In any case not to exceed $100,000 per individual per year across all crowdfunding offerings.

Funding Portals

All crowdfunding transactions must take place through an SEC-registered intermediary, which can be either a registered broker-dealer or a new entity called a “funding portal”. Funding portals must register with the SEC, become a member of FINRA, and comply with numerous rules and regulations contained in Regulation Crowdfunding. For a more detailed outline of these requirements, click here.

Required Disclosure

Companies conducting crowdfunding offerings must file certain information with the SEC and provide this information to investors and the intermediary facilitating the offering. They must also file an annual report with the SEC and provide the report to their investors. A summary of these requirements is also available at the above link.

A Game Changer for Small Investors?

Many people are excited about the prospect of small private companies being able to raise money from “main street” investors. However, crowdfunding has some drawbacks, including all the hoops that must be jumped through to qualify. More importantly, to obtain a meaningful amount of capital, the company will need as many as a hundred or possibly even several hundred investors, due to the tiny amounts that may be invested. Not only is this a daunting administrative burden, it also greatly increases the chances that the company will get at least one (if not more than one) “squeaky wheel” investor, who at the least drains management time with questions and complaints, and at the worst could end up filing a securities lawsuit. Time will tell how effective this new crowdfunding exemption proves to be.

California’s New LLC Law: What You Need To Know

December 4, 2014 By Rick Randel

On January 1, 2014, the previous law governing California limited liability companies (LLCs) was replaced by a new law, called the Revised Uniform Limited Liability Company Act (RULLCA). There is no “opt in” or “grandfather” clause; all California LLCs are now governed by RULLCA, whether they like it or not.

RULLCA’s general approach is to allow the parties to an LLC to describe how that LLC will be governed in their Operating Agreement. However, RULLCA contains some provisions that cannot be waived or altered by the Operating Agreement. More importantly, RULLCA contains some “default” provisions that apply, unless your Operating Agreement provides otherwise. It is important to know what those provisions are and, if you don’t like them, make sure your Operating Agreement provides otherwise. If it does not, you’ll need to amend your agreement.

Following is a brief summary of RULLCA default provisions that apply, unless your operating agreement provides otherwise.

Actions Requiring Unanimous Consent of Members

If your LLC is managed by a manager (as opposed to the members), the unanimous consent of all members is required for the manager to do any of the following:

Sell all, or substantially all, of the LLC’s assets outside the ordinary course of business.
Merge the LLC with another company or convert it to a different type of entity (e.g. a corporation).
Undertake any other act outside the ordinary course of the LLC’s business.
Amend the operating agreement.

If you are the manager, you probably don’t want to have to get the consent of all your members to take the above actions. If your Operating Agreement states that the above actions require majority consent (or two-thirds or other percentage), then you are okay because your agreement provides otherwise. If your agreement is silent on this issue, then RULLCA applies and you need unanimous consent. In that case you might want to amend your Operating Agreement to require the consent of a majority or some other percentage of the members (with the possible exception of amending the agreement, where it’s fairly common to require unanimous consent).

Mandatory Indemnification

RULLCA’s default is to require the LLC to indemnify the manager and members against any liability they may occur while acting as a manager or member, provided they complied with the fiduciary duties described in RULLCA. This means there is no opportunity for the manager or the other members to review the facts and circumstances of each case and decide if indemnification is warranted. If your Operating Agreement states that the LLC “may” (not “shall”) indemnify the manager or members, then you are covered. However, if your Operating Agreement does not address this issue, then RULLCA governs. In that case you may wish to amend your Operating Agreement to state that the LLC may indemnify the manager/members in certain instances (and set forth the standard and procedure for indemnification). Of course, if you are the manager, you may prefer RULLCA’s default position.

Voting Rights

Unless the Operating Agreement provides otherwise, members vote in proportion to their allocated share of the LLC’s profits. If you want a different voting scheme (e.g., by capital contributions, or one vote per member regardless of ownership interest), your Operating Agreement needs to say that. Also, under RULLCA, any amendment to the Articles of Organization or the Operating Agreement requires unanimous consent. If you want a lower percentage (say, two-thirds or a majority), your Operating Agreement needs to say so. All other matters require majority consent. If you want a higher percentage for certain matters (say, two-thirds consent to approve a merger or conversion or the dissolution of the LLC), you need to say that in your Operating Agreement (remember that a sale of assets requires unanimous consent, unless you specify a lower percentage).

Other Considerations: Advantageous Provisions

The converse of the default provisions that apply unless your Operating Agreement provides otherwise, are certain potentially beneficial provisions of RULLCA that apply only if they are included in your Operating Agreement:

Modify Duty of Loyalty

Although the Operating Agreement cannot eliminate the duty of loyalty of the manager and/or members to each other and the LLC, it can partially reduce that duty by (i) specifying types or categories of activities that do not breach that duty, and/or (ii) specifying a number or percentage of members that can approve an act that would otherwise breach that duty. For example, the Operating Agreement can state that the manager and/or members have other business activities that they engage in, and they can continue to engage in those activities even if they compete with the LLC. Many Operating Agreements already contain such provisions. If yours does not, you may want to amend it to take advantage of this.

Note that any reduction of the duty of loyalty may be made only with the informed written consent of the members. Therefore, you probably need to inform them what the “default” standard is under RULLCA, and that any proposed amendment is a reduction or modification of that standard.

Limitation of Liability

The Operating Agreement may eliminate or limit the manager’s and/or the members’ liability to the LLC and the members for money damages, except for the following:

Breach of the duty of loyalty;
A financial benefit received by the member or manager to which the member or manager is not entitled;
A member’s liability for excess distributions;
Intentional infliction of harm on the LLC or a member; or
An intentional violation of criminal law.

Most Operating Agreements do not contain a provision implementing the above, because it was not in the prior LLC law. Therefore, you may want to consider adding such a provision to your Operating Agreement.

Adapt Terminology

If you are going to amend your Operating Agreement, you should change some of the terminology to dovetail with RULLCA. Your Operating Agreement probably contains a definition of “the Act” that identifies the prior law. You should change that definition so that “the Act” means RULLCA. Also, the previous terms “economic interest” and “withdrawal” have been changed to “transferable interest” and “dissociation”, respectively. If you are going to amend your Operating Agreement anyway, you should update the terminology to match RULLCA. If you have no other reason to amend the agreement, however, it’s not essential to do this.

If your business operates in the LLC format, you may want to take a look at your Operating Agreement and consider amending it to take full advantage of RULLCA (and avoid any provisions of RULLCA you don’t like). If you do consider amending your Operating Agreement, be sure to review the section regarding amendments. You must comply with those requirements (including the consent of a certain percentage of members) to amend the agreement.

For a general summary of the changes implemented by RULLCA, click here.

If you have any questions about the new law or how it may affect your LLC, please give us a call.