Today, the Securities and Exchange Commission adopted amendments to the “accredited investor” definition in Rule 501(a). These are:
- adding a new category that permits natural persons to qualify as accredited investors based upon certain professional certifications, designations or credentials or other credentials issued by an accredited educational institutions which the Commission may designate from time to time, by order. The Commission designated holders in good standing of the Series 7, Series 65 and Series 82 licenses as qualifying natural persons.
- including, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund.
- clarifying that LLCs with more than $5mm in assets may be accredited investors.
- including SEC and state registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs).
- adding 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 $5mm, and that was not formed for the specific purpose of investing in the offered securities.
- adding “family offices” with at least $5mm in assets under management and their “family clients,” as those terms are defined under the Investment Advisers Act; and
- adding the term, “spousal equivalent” to the accredited investment definition.
The Commission also expanded the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 mm in securities owned and invested threshold.
Full release is here: https://www.sec.gov/rules/final/2020/33-10824.pdf
I largely agree that the use of financial wealth as a proxy for financial sophistication is limited and think the SEC’s general approach of attempting to liberalize the rules to facilitate the participation in the private markets for a broader group of people based upon education and experience, is a step in the right direction. Of course, determining which set of experience should count is, as evidenced by the variety of comments received to the proposed rules, much more difficult.
For fund managers, the inclusion of “knowledgeable employees” cleans up a prior inconsistency in the regulations. Prior to these amendments, certain investment professionals were considered “qualified clients” or “qualified purchasers” with respect to certain Advisers Act rules pertaining to the ability to charge carried interest, but were not inherently “accredited investors” thus limiting to some degree the exceptions. This allows a broader category of investment professionals to invest in the funds sponsored by their firm.
An interesting side note was the reference in the release to two comments to the adopting release provided by the National Association of Securities Administrators and the California Attorney General which noted that the process in the rules which permit the Commission to add other categories of accredited investors: As the CA Attorney General letter stated, ““[t]he proposed process
fails to afford stakeholders an opportunity to provide valuable insight on proposed changes and violates the Administrative Procedures Act.”