On Aug. 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to Rule 501(a), Rule 215 and Rule 144A of the Securities Act of 1933 (Securities Act). These amendments are part of the SEC’s efforts to more effectively identify qualified investors and allow for expanded investment opportunities, while still maintaining appropriate levels of investor protections.

Likely the most impactful of these amendments was the update to the definition of “accredited investor” under Rule 501(a). The existing text of Rule 501(a) states that a natural person would qualify as an accredited investor if they met certain income or net worth thresholds. With the updates, the SEC will now consider persons with certain professional certifications, designations or credentials (as designated by the SEC from time to time) to qualify as accredited investors. The SEC initially identified holders of Series 7, Series 65, and Series 82 licenses as qualifying under this new expansion. Additionally, the amendments contemplate that a “spousal equivalent” can be considered for purposes of determining qualification based on income or net worth. The SEC first recognized spousal equivalents when it adopted Rule 202(a)(11)(G)-1 in 2011, where it defined a spousal equivalent as “a cohabitant occupying a relationship generally equivalent to that of a spouse.” (See 17 C.F.R. 275.202(a)(11)(G)-1). In addition to persons with certain certifications, individuals that qualify as “knowledgeable employees,” as defined in Rule 3c-5(a)(4) of the Investment Company Act of 1940 (Investment Company Act), of the private-fund issuer of the securities being offered may also qualify as accredited investors, but only as it relates to those specific securities.

The amendments also expanded the scope of certain entities that would qualify as accredited investors. First, the amendments create a new category for any entity that owns “investments” (as defined under Rule 2a51-1(b) of the Investment Company Act) in excess of $5 million, so long as that entity was not formed for the specific purpose of investing in the securities offered. The amendments also make some important clarifications regarding “family offices,” and their “family clients” (as defined under the Investment Advisers Act), as well as limited liability companies. So long as each has at least $5 million in assets, or assets under management as it relates to family offices and family clients, those entities may now qualify as accredited investors.

Similar expansions and clarifications were made to the definition of “qualified institutional buyer” under Rule 144(A) to conform to the revised accredited investor definition. Specifically, the amendments expand the list of qualified institutional buyers to include rural business investment companies, limited liability companies, and any institutional investors included in the new accredited investor definition not already contemplated in the definition of “qualified institutional buyer,” so long as each of the foregoing satisfies the $100 million in securities owned and invested threshold.

These amendments and any corresponding orders will take effect 60 days after publication in the Federal Register, which is expected to be sometime in November this year.

You can read more at the SEC Press Release here.