Financing

Accredited Investor

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The definition of Accredited Investor has been expanded by the SEC?

by Zachary Fountas

On August 26, 2020 the SEC announced that it was making changes to the definition of “Accredited Investor” which could impact private placements under Regulation D. Over the years startups and emerging businesses have relied on Rule 506(b) securities offerings in order to take advantage of federal preemption and exempt the offering from regulation by various state regulators. However, under Rule 506(b), securities could only be sold to high net-worth or high-earning individuals, or certain qualified entities.

Emerging growth companies now will be able to reach out to an expanded category of “accredited” investors in financing rounds.

The following are general descriptions of individuals/entities that qualify as Accredited Investors, but it remains imperative to consult with legal counsel to ensure investors meet the requirements of the category:

Individuals

  • Regardless of net-worth or income, individuals with Series 7, Series 65, or Series 82 certifications are considered financially sophisticated enough to qualify as Accredited Investors
  • Individuals who are “knowledgeable employees” of a private fund (if such investment is in the aforementioned fund)
  • Inclusion of “spousal equivalents” in the individual test. Previously an individual could only pool net worth and income with a spouse. “Spousal equivalent” as defined in the “family office rule” is a cohabitant occupying a relationship generally equivalent to that of a spouse. (See 17 CFR Section 275.202(d)(9))

Entities

  • Limited Liability Companies with $5 million in assets are expressly designated as Accredited Investors
  • State-registered investment advisers, exempt reporting advisers, and rural business investment companies
  • Indian tribes, governmental bodies, funds, and entities of foreign countries, that own “investments” (specifically requires investment test not an asset test) under the Investment Company Act in excess of $5 million
  • Family Offices with at least $5 million assets under management and their “family clients”

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