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.
