SEC Proposes an Updated “Accredited Investor” Definition

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Under the current rule, an “Accredited Investor” is defined by “any person who falls within any of the following categories, or who the issuer reasonably believes falls within any of the following categories, at the time of sale of the securities to that person…” and lists entities such as banks, savings and loan associations. The SEC is proposing amendments to the rule of what defines an accredited investor.

SEC Proposed Amendments

The SEC proposed Amendments would add new categories of entities, such as a “Catch all” category for any entity owning in excess of $5 million in investments. Specifically, the proposed amendments to the accredited investor definition would include:

  • Creating new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
  • Adding “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 equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances in order to qualify as accredited investors
  • Adding a new category for any entity; including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
  • Including a limited liability companies that meet certain conditions, registered investment advisors and rural business investment companies to the current list that qualify as accredited investors
  • With respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee”

Highlights of these changes

The changes proposed by the SEC would modernize this definition to allow for more investors to participate in private offerings. The proposal also specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets. This will be done by adding new categories of natural persons that may qualify based on their professional knowledge, experience, or certifications. Additionally, the proposal expands upon the current list of entities that may qualify as accredited investors by allowing any entity that meets an investments test to qualify. Overall, the proposal will increase opportunities for individual natural persons and other organizations to become accredited investors.

Contact Colonial for further information and insight on accredited investors.

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