On August 26, 2020, the United States Securities and Exchange Commission (the “SEC”) adopted updates to the definitions of “accredited investor” in Rule 501(a) of Regulation D and “qualified institutional buyer” in Rule 144A. These updates will take effect 60 days after the they are published in the Federal Register.
Once these changes are effective, accredited investor categories and qualified institutional buyer references in offering documents will need to be updated to address the new categories and revisions.
Among other things, these updates:
- Permit the following to qualify as accredited investors under Rule 501(a) of Regulation D:
- Individuals holding in good standing certain professional certifications or designations or credentials from an accredited educational institution, as designated from time to time by order of the SEC. Initially, the SEC has designated holders in good standing of the Series 7[i], Series 65[ii] and Series 82[iii] licenses as qualifying individuals;
- With respect to investments in a private fund, individuals who are “knowledgeable employees” (as defined in Rule 3c-5(a)(4) under the United States Investment Company Act of 1940 (the “Investment Company Act”)) of the fund;
- Limited liability companies with total assets in excess of U.S.$5 million not formed for the specific purpose of acquiring the securities being offered;
- SEC-registered and state-registered investment advisers, investment advisers exempt from registration under Section 203(l) or (m) of the United States Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”), and rural business investment companies (“RBICs”);
- Any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that owns “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act) in excess of U.S.$5 million and that was not formed for the specific purpose of acquiring the securities being offered; and
- “Family offices” (as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act) with assets under management in excess of U.S.$5 million, not formed for the specific purpose of acquiring the securities being offered, and whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment, and the “family clients,” (as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act) of a family office meeting the accredited investor requirements and whose prospective investment in the issuer is directed by such family office.
- Added the term “spousal equivalent” to certain individual accredited investor definitions, to allow spousal equivalents to pool their finances for the purpose of qualifying as accredited investors. “Spousal equivalent” is defined as “a cohabitant occupying a relationship generally equivalent to that of a spouse.”
- Revised the definition of “qualified institutional buyer” (“QIB”) in Rule 144A to add: (i) limited liability companies, (ii) RBICs, and (iii) any institutional accredited investors, as defined in Rule 501(a), that are not otherwise included in the definition of QIB; provided, that to qualify as a QIB a limited liability company, RBIC and/or other entity must in the aggregate own and invest on a discretionary basis at least U.S.$100 million in securities of issuers that are not affiliated with the limited liability company, RBIC and/or other entity.
While these changes are modest in their scope, they will expand the number of investors that can qualify as accredited investors and QIBs.
Here are links to the SEC’s adopting release (https://www.sec.gov/rules/final/2020/33-10824.pdf) and order (https://www.sec.gov/rules/other/2020/33-10823.pdf).
Please call (303-683-2642) or email (info@cascorplaw.com) us if you have any questions about these changes or how they impact offerings.
[i] The General Securities Representative license (Series 7) is developed and administered by Financial Industry Regulatory Authority, Inc. (“FINRA”). [ii] The Investment Adviser Representative license (Series 65) is developed by the North American Securities Administrators Association and administered by FINRA. [iii] The Private Securities Offerings Representative license (Series 82) is developed and administered by FINRA.