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On August 26, the Securities and Exchange Commission (SEC or Commission) adopted amendments to the definitions of “accredited investor” and “qualified institutional buyer” under Rules 501(a) and 144(a) of the Securities Act of 1933, as amended (Securities Act), which were originally proposed in December 2019 to expand the types of qualifying individuals and entities. The amendments are designed to update and more effectively identify institutional and individual investors who have the knowledge and expertise to participate in private capital markets. The amendments:

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Qualification by Professional Certification

The Commission proposed to designate by order certain professional certifications, designations and other credentials from an accredited educational institution as qualifying for accredited investor status. After considering comments, the Commission adopted the amendments substantially as proposed. It designated the General Securities Representative license (Series 7), Private Securities Offerings Representative license (Series 82) and Licensed Investment Adviser Representative (Series 65) as the initial qualifying certifications, so long as the holders are in good standing. To comply with the good standing requirement, the license holder must have passed the required examinations and must maintain the license or registration in good standing.

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The Commission added a category to the accredited investor definition that would enable “knowledgeable employees,” as defined in Rule 3c-5(a)(4)<a title="" href="#_edn1" name="_ednref1">[1]</a> under the 1940 Act, of a private fund to qualify as accredited investors for investments in the fund. The Commission noted that it believes such employees, through their knowledge of and active participation in the private fund’s investment activities, are likely to be financially sophisticated and capable of fending for themselves in evaluating investments and stated that these employees, by virtue of their position with the fund, are presumed to have meaningful investing experience and sufficient access to the information necessary to make informed investment decisions about the fund’s offerings.

The Commission initially proposed to include investment advisers registered under the Advisers Act of 1940 (Advisers Act) and advisers registered under state laws. It adopted the proposal but also added exempt reporting advisers. Advisers registered under the Advisers Act, state-registered advisers and exempt reporting advisers will now qualify as accredited investors so long as they meet the $5 million in assets test under Rule 501(a)(3) of the Securities Act.

The Commission expanded the definition of accredited investors to include RBICs.<a title="" href="#_edn2" name="_ednref2">[2]</a> It noted that the purpose of RBICs is similar to that of Small Business Investment Companies, which already qualify as accredited investors, and that amending the definition to include RBICs would provide similar treatment under federal securities laws.

Under the amendments, limited liability companies may qualify so long as they have at least $5 million in assets and were not formed for the specific purpose of acquiring securities being offered.

As proposed, the Commission added a broad category to the definition of accredited investors to include any entity that owns at least $5 million in investments that is not formed for the purpose of acquiring the securities being offered. In adopting this proposal, the Commission noted that it intended to capture all entity types that were not already included in the accredited investor definition, as well as any entities that may be created in the future.

The Commission adopted amendments allowing family offices and their family clients to qualify as accredited investors. A family office may qualify so long as it has at least $5 million in assets under management, it is not formed for the specific purpose of acquiring the securities offered, and its prospective investment is directed by a person who has sufficient knowledge and experience in financial and business matters to make the family office capable of evaluating the prospective investment’s merits and risks. The amendments also include family clients of a family office that meets the requirements stated above, whose prospective investment in the issuer is directed by the family office.

The Commission adopted, as proposed, amendments that allow a natural person to include a spousal equivalent (a person occupying a relationship generally equivalent to that of a spouse) when calculating joint income under Rule 501(a)(6) of the Securities Act. The Commission noted that by doing so it promotes consistency with various existing rules.

Although the Commission adopted many of the proposed amendments, it declined to modify the accredited investor financial thresholds. It noted that it was evaluating the effectiveness of the current thresholds to include changes beyond the impact of inflation, such as changes over the years in the availability of information and advances in technologies. The Commission further noted that it was not persuaded that investor protections provided by the financial thresholds have been meaningfully weakened over time due to inflation.

The Commission expanded the qualified institutional buyer definition by specifically adding RBICs, limited liability companies and other entities to correspond to the accredited investor amendments, so long as those entities meet the $100 million in securities owned and invested threshold. However, the Commission declined to expand the definition to include certain other categories that were proposed during the comment period.

Cassandra W. Borchers 513.352.6632 <a href="mailto:Cassandra.Borchers@ThompsonHine.com">Cassandra.Borchers@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

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<a title="" href="#_ednref1" name="_edn1">[1]</a> Rule 3c-5(a)(4) under the 1940 Act defines a “knowledgeable employee” with respect to a private fund as: (i) an executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the private fund or an affiliated management person (as defined in Rule 3c-5(a)(1)) of the private fund; and (ii) an employee of the private fund or an affiliated management person of the private fund (other than an employee performing solely clerical, secretarial or administrative functions with regard to such company or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such private fund, other private funds, or investment companies the investment activities of which are managed by such affiliated management person of the private fund, provided that such employee has been performing such functions and duties for or on behalf of the private fund or the affiliated management person of the private fund, or substantially similar functions or duties for or on behalf of another company for at least 12 months.

<a title="" name="_edn2" href="#_ednref2">[2]</a> A RBIC is defined in Section 384A of the Consolidated Farm and Rural Development Act as a company that is approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary. RBICs are intended to promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in such areas.

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SEC Expands Accredited Investor and Qualified Institutional Buyer Definitions

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