On Wednesday, August 26, the Securities and Exchange Commission (“SEC”) announced an amendment to the definition of Accredited Investor. The SEC proposed a rule change to update the definition of Accredited Investor on December 18, 2019. That change was announced yesterday in an attempt to “modernize” the rule.
History of Accredited Investor
An Accredited Investor is a person or entity able to deal in securities, commonly utilized in relation to investing in private companies. The rule was initially put into place as an exception to the Securities Act of 1933 (“the Securities Act”). The Securities Act, enacted as a response to the stock market crash in 1929 and the Great Depression, required securities to be registered to protect investors. However, the Accredited Investor rule allows certain individuals and entities to invest in private securities that are not registered with the SEC.
The amendment changes Rule 501(a), Rule 215, and Rule 144A of the Securities Act. A full list of changes can be found on the SEC Fact Sheet, but here is a short summary:
- Individuals passing the Series 7, Series 65, or Series 82 exams and holding any of those three licenses in good standing;
- With respect to investment into private funds, people who are “knowledgeable employees” of the fund;
- Entities including Indian tribes, governmental bodies, and entities organized under laws of foreign countries that own “investments” in excess of $5M that was not formed specifically for the purpose of investing;
- “Family offices with at least $5M in assets under management and their “family clients”; and
- “Qualified institutional buyer” now includes limited liability companies and RBICs provided they satisfy the $100M in securities owned and invested requirement.
Impact on Startups and Private Investing
Why is this important? This rule change allows more people and entities to invest in private placements. The rule change increases access to capital for private companies allowing certain entities and individuals to invest in technology startups, investment funds, and other entities relying on certain exemptions such as Rule 506 of Regulation D.
This post is provided for general information purposes and is not legal advice. As always, if you have any questions about this post or how it might impact your business, contact one of our attorneys.