New SEC Rules Open Access to the Market for Private Securities
08 Dec 2020
Effective today, the SEC will allow more middle-class individuals to participate in private securities offerings. The SEC’s new rule will consider some classes of prospective investors as “accredited” based on their experience and ability to assess an investment opportunity—in addition to the customary wealth/income test.
Under the new rule, the SEC expanded the definition of “accredited investor” to include natural persons who have obtained (and are in good standing with) certain professional designations and certification. In a separate order, the SEC has initially designated General Securities Representative licenses (Series 7), Private Securities Offerings Representative licenses (Series 82), and Licensed Investment Adviser Representatives (Series 65) as qualifying certifications under this rule. More qualifying certifications are likely to come. The SEC will consider four factors in determining whether to qualify a certification under this rule. These factors broadly focus on whether the person holding such certification possesses sufficient knowledge and experience in financial and business matters in order to evaluate the risks and merits of an investment.
The new rule will also assist individuals who have “spousal equivalents” to achieve accredited status. Natural persons may include joint income from “spousal equivalents” (i.e., a cohabitant occupying a relationship generally equivalent to that of a spouse) when calculating joint income under Rule 501(a)(6), and determining net worth under Rule 501(a)(5). This expansion is consistent with other rulings made by the SEC.
Other provisions of the new SEC rule:
- Knowledgeable Employees – The SEC added a new category to the definition of accredited investor for a “knowledgeable employee” of a private fund who is making an investment in such fund. The definition of “knowledgeable employee” generally includes executive officers, directors, trustees, general partners, and advisory board members of the private fund, and certain employees who, in connection with their regular functions or duties, participates in the investment activities of the private fund, or a similar fund, for at least 12 months. This is a slight expansion and clarification of the current rule, which only specified certain officer positions.
- Catch-All for Entities Meeting an Investments-Owned Test – The new rules add a “catch-all” for any entity that owns certain qualifying investments in excess of $5 million that is not formed for the specific purpose of acquiring the securities being offered. Among other things, the expanded definition includes Indian tribes, labor unions, governmental bodies and funds, and entities organized under the laws of a foreign country.
- Limited Liability Companies – Perhaps the most common investment vehicle (the LLC) is now specifically listed under Rule 501(a)(3) (although the SEC had a longstanding practice of permitting LLCs under the “accredited investor” definition).
- Family Offices – The new rules expand the definition of accredited investor to include (i) family offices with assets in excess of $5 million that are not formed for the specific purpose of acquiring the securities being offered, and (ii) certain family members of a qualifying family office who are making investments at the direction of the family office. Generally speaking, a “family office” is any entity established by a family to manage their assets.