On August 26, the Securities and Exchange Commission (“SEC”) adopted amendments to modernize the definitions of “accredited investor” and “qualified institutional buyer.” Both sets of amendments expand the list of eligible investors under these definitions.
For private fund managers, the “accredited investor” definition is the baseline threshold for offering interests in those funds. In the past, the sole criteria for individual investors were meeting either a net worth or income standard. The list of qualifying entities was quite limited. Metrics of sophistication were not considered at all.
On the flip side, funds themselves might have their investment activities limited to the extent that they were not “qualified institutional buyers,” more commonly referred to as QIBs.
The amendments allow individuals to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications, in addition to the existing tests for net worth or income. The amendments also expand the list of entities that may qualify, including any entity that meets an investments-based test.
Highlights from these amendments are discussed below.
Accredited Investor Definition in Rule 501(a)
The amendments now include the following:
- Individuals based on certain professional or educational certifications, designations or credentials, which the SEC may identify by order. Along with this amendment, the SEC deemed holders in good standing of the Series 7, Series 65 and Series 82 licenses as accredited investors. The SEC is empowered to revisit or add other qualifications going forward. We are surprised that the SEC did not specifically include Chartered Financial Analysts, which is a prevalent and hard-earned industry designation.
- Similar to the “qualified client” definition for charging performance-based fees, individuals who are “knowledgeable employees” of the fund;
- Limited liability companies with $5 million in assets;
- Registered investment advisers (SEC or state), exempt reporting advisers and rural business investment companies (“RBICs”);
- Any entity, including Indian [sic] tribes, governmental bodies, funds and entities organized under non-U.S. laws, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- “Family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act.
Lastly, with respect to the income threshold for individuals, the term “spousal equivalent” is added so that all couples, regardless of traditional marital status, may pool their finances for the purpose of qualifying as accredited investors.
Qualified Institutional Buyer Definition in Rule 144A
The amendments now include the following:
- Limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold; and
- Any institutions that are accredited investors, not otherwise deemed QIBs (still subject to the $100 million threshold).
The amendments will take effect 60 days after publication in the Federal Register. The full release and fact sheet are available here. We would be happy to discuss the implications for your compliance policies and procedures and marketing processes.
