In August 2020, the SEC amended its definition of “accredited investor,” expanding the list of individuals eligible to invest in companies via private offerings under Regulation D.
The “accredited investor” definition is important for companies who intend to file safe harbor exemptions for private offerings under Regulation D, including under Rules 506(b) and 506(c). For more information on these exemptions, please see our previous blog post on this topic. Until the recent amendment, an individual did not qualify as an “accredited investor” unless that individual had either (i) an income exceeding $200,000 in the two most recent years (or $300,000 jointly with a spouse); or (ii) had an individual net worth (or joint net worth with spouse) exceeding $1,000,000 at the time of the purchase (excluding the value of the individual’s private residence).
The recent amendment expands the definition of an individual accredited investor to include “[a]ny natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status...” Those professional certifications, designations, or credentials currently include Series 7, Series 65, and Series 82 licenses, all of which are obtained through the Financial Industry Regulatory Authority, Inc. (FINRA). Series 7 licenses are seen as a baseline securities license and allow the holder to trade most securities. Series 65 licenses allow the holder to act as investment advisor, and Series 82 licenses allow holders to sell private securities on behalf of a client. Each license is can be obtained by passing an exam; the Series 7 and 82 license also require a sponsorship prior to taking the exam.
Further, the concept of joint net worth has been expanded to include “spousal equivalents.” Additional amendments were released under the proposed rules, but the changes mentioned herein constitute the changes that will most likely be applicable in private offerings for startups.
The SEC states it does not expect this recent amendment to significantly expand the list of those eligible as accredited investors, but the amendment does demonstrate that the SEC no longer considers net worth as the sole indicator of an accredited investor. The SEC also noted in its comments to the new rule that the three initial FINRA certifications are meant to serve as the first stage of expanding the accredited investor class, signaling that others could soon join them; the new amendment also includes criteria to help the SEC determine whether any additional certification, designation, or credential should qualify an individual for accredited investor status.
From the perspective of a business looking to raise capital, the new amendment has the potential to bring in new investors, making fundraising more competitive and giving startups a larger investing pool to draw from. From an investor perspective, individuals who would like to invest in startups as an accredited investor but who do not have the net worth previously required now have other options for qualification. The SEC's creation of an avenue for the public to propose additional qualifications for the accredited investor definition should also excite businesses because it demonstrates the SEC is willing to continue to update and modernize the definition.
For a summary of the updated accredited investor definition, please see the SEC website at https://www.sec.gov/news/press-release/2020-191.
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