The Securities and Exchange Commission has adopted amendments to the “accredited investor” definition contained in Rule 501(a) of Regulation D which is one of the principal tests for determining who is eligible to invest in private capital raising transactions. Historically, individual investors who did not meet specific income or net worth tests, regardless of financial sophistication, have been denied the opportunity to participate in such investments.
In announcing the changes, SEC Chairman Jay Clayton said: “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”
Under the prior definition of “accredited investor”, an individual had to have a regular annual income of $200,000 or more, or $300,000 with spouse, or a net worth of at least $1,000,000, exclusive of personal residence. Under the amended definition, an individual can qualify as accredited based on certain professional certifications or credentials. The amendment now allows individuals in good standing under the Series 7, Series 65 and Series 82 securities licenses to qualify as accredited investors. The SEC may also designate by order from time to time additional professional certificates or credentials which would allow an individual to qualify as accredited.
The amendment also includes as accredited investors with respect to investments in a private fund natural persons who are “knowledgeable employees” of the fund.
Other changes included in the amendment are as follows:
- Clarification that limited liability companies with $5 million in assets may be accredited investors along with SEC and state regulated investment advisers, exempt reporting advisers and rural business investment trusts.
- Adding a new category of accredited investor for any entity, including Indian tribes, governmental bodies and entities organized under the laws of foreign countries that own investments in excess of $5 million and that are not formed for the specific purpose of investing in the securities offered.
- Adding to the accredited investor definition “family offices” with at least $5 million in assets under management and their “family clients” as each term is defined under the Investment Advisers Act.
- Adding the term “spousal equivalents” to the definition so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendment should facilitate private fund raising, especially venture capital and seed rounds for startup companies, by expanding the pool of individuals and entities that qualify as accredited investors.