On August 26, 2020, the Securities and Exchange Commission adopted amendments to the definitions of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, and “qualified institutional buyer” in Rule 144A under the Securities Act.
These amendments represent long-awaited changed to the definitions and will ease the requirements for private and exempt offerings of securities and increase access to the capital markets for smaller companies and start-up companies.
- expand the individuals who qualify as “accredited investors,” beyond those meeting the previous income and net worth tests and now allow persons to also qualify on the basis of professional knowledge, experience or certifications;
- expand the entities that may qualify as “accredited investors,” on the basis of, inter alia, meeting the investment tests (outlined below); and
- confirm that institutional accredited investors are QIBs, if they meet the $100 million threshold.
Corresponding amendments were also adopted for purposes of Rule 163B and Rule 215 of the Securities Act, and Rule 15g-1 under the U.S. Securities Exchange Act of 1934, as amended.
New Categories of Accredited Investors
The amendments expand the definition of “accredited investor” to include the following:
- natural persons who qualify based on certain professional certifications, designations or credentials, which initially includes holders in good standing of the Series 7, Series 65, and Series 82 licenses (but which remains subject to further evaluation and adjustment by the SEC by order);
- “knowledgeable employees” of a private fund with regard to that private fund’s securities;
- limited liability companies with $5 million in assets (simply expanding the previous exemptions for corporations with $5 million in assets);
- SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies;
- entities, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined under the U.S. Investment Company Act of 1940, as amended, in excess of US$5 million that were not formed for the specific purpose of investing in the securities offered;
- “family offices” with at least US$5 million in assets under management and their “family clients,” each as defined under the Investment Advisers Act of 1940, as amended; and
- “spousal equivalent”, so that both spouses and spousal equivalents may pool their finances for the purpose of qualifying under the income test.
Expanded Definition of QIBs
The amendments modify the definition of “qualified institutional buyer” to include the following:
- institutional investors that qualify under the “accredited investor” definition that are not otherwise covered in the definition of QIB (assuming the US$100 million threshold is satisfied); and
- include limited liability companies and rural business investment companies that meet the US$100 million in securities owned and invested threshold.
These amendments become effective 60 days after publication in the Federal Register.
We believe this will facilitate capital raising and access to capital markets for smaller companies while still maintaining the protections for investors that the accredited investor and qualified institutional buyer definitions were designed to do.
For any questions, please contact Geoff Morgan or Jessica Fairchild.
About Croke Fairchild Duarte & Beres
Croke Fairchild Duarte & Beres is a corporate law firm providing services to businesses, private equity and venture firms and their portfolio companies, public companies, founders and family offices. Formed by partners who worked at preeminent international law firms, the firm boasts a deep bench of sophisticated and experienced corporate lawyers. With offices in Chicago, Lake Forest, and Milwaukee, our team provides exceptional legal service while affording our clients the benefits of working with a small, agile, and driven law firm. For more information, please visit us online at crokefairchild.com.