Securities and Exchange Commission Loosens Accredited Investor Requirements
In September, the Securities and Exchange Commission adopted a final rule expanding the definition of Accredited Investor status under Regulation D, opening access to those who otherwise do not meet the personal financial threshold. The three biggest changes are (1) the allowance of individuals holding a Series 7,65, or 82 certification, (2) a limited carve out for “knowledgeable employees”, and (3) extended access for family offices.
Prior to this ruling, an individual Accredited Investor had to meet certain financial thresholds. The concern then was that investors taking part in private offerings not registered by the SEC needed protection against risk. Previously, all investors had to meet the financial threshold of $200,000 in income over the prior two years or $1 million in net worth, not including personal residence, to become Accredited. The SEC believes the people who meet that standard can handle the risk.
Though that policy generally remains true, the new additions to the rule were implemented with the expectation that those individuals with the ability to evaluate a private offering properly would be able to identify the risks. As a result, the financial threshold for those individuals is excepted.
Series 7, 65, 82 Certificate Holders
The SEC considered the knowledge that FINRA certified individuals hold in order to earn certification, and they feel confident these advisors are capable of evaluating private investment opportunities. Many of these advisors do, in fact, advise Accredited Investor clients on private investment. According to the SEC, FINRA certified individuals are capable of understand the dangers of unregistered offerings and, ideally, hedge against the financial dangers the SEC is concerned about.
The SEC discussed extending this exception to MBA holders, lawyers, and similar professionals. At this time, though, they are not ready to expand that quickly. For now, they will observe how the FINRA certified advisors handle the risk in non-registered investment opportunities.
A Knowledgeable Employee is a fund’s executive officer, director, trustee, general partner, advisory board member, similar manager, or, if employed by the fund for more than twelve months, an employee who performs more than clerical or administrative tasks. The intent of this exception is to allow those who have inside knowledge of the fund and an identifiable knowledge of the risks to take economic interest in the fund they work for.
Knowledgeable employees who are not otherwise deemed accredited may only invest in the fund they work for. Giving these individuals limited Accredited status allows the fund to maintain its accredited investor status for the purpose of investing in other investments that are only available to Accredited Investors.
As an added benefit, spouses of knowledgeable employees may join in on the investment as well.
A family office generally is a company that has no clients other than family members, former family members, and certain key employees of the family office, as well as certain of their charitable organizations, trusts, and other types of entities. The SEC added the following thresholds for family offices to be deemed Accredited Investors: (i)more than $5 million in assets under management, (ii) not formed for the specific purpose of acquiring the securities offered, and (iii) its investment are directed by a qualified individual who can assess the risks of investment and invests in accordance with the preferences of the family office.
With these adjustments listed above, the SEC is broadening the definition of the Accredited Investor to increase liquidity in the private markets. Additional investors will be able to participate in securities offerings conducted pursuant to Rules 506(b) and 506(c) of Regulation D (including private fund offerings) and in offerings conducted pursuant to Rule 144A. With these additions, the typical paperwork required for private offerings will need to be amended. Subscription documentation for private offerings for which "accredited investor" status is a key component (e.g., Rules 506(b) and 506(c)) will need to be updated to include references to the new categories. When relying on the 506(c) exemption, sponsors will need to re-assess the documentation issued by Accredited Investors that qualify under these new rules.