SEC Amends Definitions of "Accredited Investor" and "Qualified Institutional Buyer"

Client Alert
September 1, 2020

The Securities and Exchange Commission has adopted amendments to its current rules under the Securities Act of 1933 relating to the definitions of an "accredited investor" and a "qualified institutional buyer." The amendments modify the definition for an accredited investor to include new categories of qualifying natural persons and entities and for a qualified institutional buyer to include some of the same entities that meet the other requirements of Rule 144A.

According to the SEC, the amendments are "intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections."

What You Need to Know

The amendments adopted are substantially the same as the SEC’s prior proposals - for more information on such proposals see our prior Client Alert. The amendments will be effective in early November.

These amendments broaden the categories of investors to whom certain private offerings of securities, including offerings by operating companies, hedge funds, private equity funds, venture capital funds, angel funds, and private real estate funds, may be made.

Changes to Accredited Investor Definition

The amendments to Rule 501(a) (and Rule 215, which will now simply cross reference to Rule 501(a)) update and expand the definition of an accredited investor in the following ways:

Natural Persons

Prior to the adoption of the amendments the SEC’s definition of an accredited investor used wealth as a "proxy" for financial sophistication. In adopting the amendments, the SEC stated that the "characteristics of an investor contemplated by the [accredited investor] definition can be demonstrated in a variety of ways… includ[ing] the ability to assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss."

Additionally, the SEC welcomes other accredited educational institutions, self-regulatory organizations, industry bodies or the general public to submit other certifications or designations, including specific degrees or programs of study, that meet the attributes enumerated in Rule 501(a)(10) for the SEC to consider including in the accredited investor definition.

Entities

Spousal Equivalents

The term "spousal equivalent" has been added to Rule 501(a)(5) and (6) to allow natural persons to include their spouses or spousal equivalents when calculating joint income or joint net worth. Spousal equivalent is defined as "a cohabitant occupying a relationship generally equivalent to that of a spouse." This definition matches that of the definition used elsewhere by the SEC in Regulation Crowdfunding and the Jumpstart Our Business Startups (JOBS) Act.

A new note under Rule 501(a)(5) makes clear a long-standing staff interpretation that assets for the joint net worth test do not need to be held jointly; nor do the securities need to be purchased jointly.

Changes to Qualified Institutional Buyer Definition

The amendments to Rule 144A expand the definition of qualified institutional buyer in much the same way as the accredited investor definition was expanded, including:

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If you would like further information regarding the above referenced amendments or their impact, please contact the lawyer at Sullivan with whom you regularly consult or either of the lawyers listed above.

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