Securities law compliance is an important component of capital formation for startups, operating companies, family offices, and venture capital and private equity firms. Under Rules 506 and 144 under the Securities Act of 1933, private offerings of securities are limited to “accredited investors” in an effort to protect unsophisticated investors from the risks inherent in private market investments.
Recently, the Securities and Exchange Commission (SEC) adopted amendments to the definition of who qualifies as an “accredited investor.” Formerly, accredited investors were only persons or entities with income or net worth exceeding certain levels. Under the SEC’s new rules, “investors [may also] qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.”
This rule change enables the SEC to designate certain individuals to qualify as an accredited investor based on specified professional certifications, designations or credentials. Among the first designations are individuals who hold Series 7, 65 or 82 financial industry licenses. Additionally, “knowledgeable employees” of a private fund (as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940), LLCs or family offices (and their family clients) with $5 million in assets, SEC and state registered investment advisers, exempt reporting advisers and rural business investment companies are among the new individuals or entities who qualify as accredited investors. Finally, “spousal equivalents” will now be accredited investors, meaning they may pool their finances for the purpose of qualifying as accredited investors.
Though the definition of who qualifies as an accredited investor has been expanded, we do not expect the private investment landscape to change dramatically. Behind the accredited investor limitation remains the goal of protecting unsophisticated investors from undue risk. These amendments acknowledge that certain investors may be fairly situated to evaluate investment risk without strict reliance on the income or net worth tests. As such, companies looking to raise capital will still need to keep the accredited investor limitation in mind and prioritize adequate disclosure to investors.
These updated rules are effective 60 days after publication in the Federal Register. We invite you to reach out to your Hirschler adviser with any questions or to assist with an investment transaction or your next capital raise.
Myrna H. Rooks