Recent Amendments to Definition of “Accredited Investor” Now Effective; Individuals May Now Also Be Accredited Through Credentials

In August 2020, the SEC adopted amendments to the definition of “” that will expand in certain securities offerings including those conducted under Rules 506(b) and 506(c) of , Regulation , and Regulation A.  These amendments, which became effective this week, may significantly increase eligibility for individuals and entities that wish to invest in emerging companies.

In this post, we will explore one important aspect of the SEC’s recent rule changes regarding : individuals deemed through their , designations, and/or credentials or their job-specific knowledge.

Historically, status for individuals has been determined solely through income or net worth metrics established by the SEC or by an individual’s role as a director, executive officer, or of the company issuing securities.  But, as the SEC has acknowledged, financial thresholds are an imperfect for financial sophistication and the ability to fend for oneself in an investment.  

The amended rules now an additional path for outsider investors: an individual—regardless of his or her financial status—is deemed to be an if he or she holds, in good standing, a professional certification or credential designated by the SEC as meeting specified requirements.  In connection with the amendments, the SEC determined that Series 7, Series 65, and Series 82 licenses issued by FINRA qualify as sufficient.  Adopting an incremental approach, the SEC also established a process whereby it may designate other or credentials in the future.  

Similarly, the amended rules deem certain individuals associated with private funds such as qualifying funds, venture capital funds, or —referred to as “knowledgeable employees” in the Investment Company Act of 1940—to be for investments in their funds.  Knowledgeable employees include officers and directors of the fund as well as certain employees who have been engaged in investing activities at the fund for at least a year.  In addition to expanding investment opportunities for these individuals, this amendment also prevents a smaller private fund from losing its own status as an because of sales to who otherwise do not qualify as .

For additional information on this topic and related matters, please see our other posts discussing the amendments to the definition of or consult a legal advisor at WilmerHale.

By Avery Reaves