The SEC yesterday amended the definition of an “Accredited Investor” to allow investors to qualify based on their professional knowledge, experience or certifications, in addition to the existing tests for income and net worth. The amendments also expand the list of entities that may qualify as accredited investors.
Background
The accredited investor definition is a central component of Rule 506 exemptions from registration and plays a significant role in other exemptions and other federal and state securities law contexts. By qualifying as an accredited investor, an individual or institution can participate in investment opportunities that are generally not available to non-accredited investors. In the past, individual investors who have not met specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in these types of investments.
Designations, Certifications and Credentials
The SEC has designated the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65) as the initial eligible certifications, designations, and credentials. To meet this requirement, the individual must have passed the required examination and must maintain the license or registration, as applicable, in good standing. The SEC noted that since issuers must verify whether an investor is an accredited investor, these certifications and designations are relatively easy to verify. Additional designations, certifications, or other credentials may be added in the future.
Knowledgeable Employees
The SEC has also added “knowledgeable employees” of a private fund to the expanded definition of an accredited investor. This category includes, among other persons, trustees and advisory board members, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund’s investments, as well as employees of the private fund or the affiliated person of the fund (other than employees performing solely clerical, secretarial, or administrative functions) who, in connection with the employees’ regular functions or duties, have participated in the investment activities of such private fund for at least 12 months.
Entities
The SEC is also extending the accredited investor status to all SEC and state-registered investment advisers as well as all exempt-reporting advisers. Limited liability companies that that meet the requirements of Rule 501(a)(3), that have total assets in excess of $5 million, and that were not formed for the specific purpose of acquiring the securities being offered are also included. Other entities, such as certain family offices, are also now included in the definition.
The financial thresholds for an Accredited Investor were not modified.
The amendments will be effective 60 days after publication in the Federal Register.
Click here to see the final, adopted rule.
If you have any questions, please contact NCA Compliance.Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
