Here is a detailed breakdown of the new SEC "accredited investor" rule adjustments, which have the effect of widening access to alternative investments such as private equity. The hunt for yield is encouraging more high net worth and ultra-HNW individuals into the space, but barriers remain.

The following commentary and guidance about recent changes to the “accredited investor” regulation comes from international law firm Squire Patton Boggs. The editors reprint this guidance with the firm’s permission. Family Wealth Report is grateful to the firm for this material; the usual editorial disclaimers about such commentary apply.

Some of the detail here is technical. The first segment of this article gives a broad view about how rules work. Below the sub-head “terms and use” is more technical material that readers, depending on their level of expertise and focus, might want to skip over. 

As always, reader feedback is welcomed and essential. Email the editors at tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

On August 26, 2020, the Securities and Exchange Commission announced revisions to Rule 501(a) of Regulation D, updating the definition of “accredited investor.” The revised rule will become effective 60 days after publication in the Federal Register. 

The revisions were not dramatic. On the one hand, the amendments recognize the reality of modern family units by adding “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. On the other hand, the Commission chose not to adjust for inflation the monetary income and wealth test elements of the existing definition. 

These tests have been in effect since 1982, although, as the Commission pointed out in its release, the calculation of net worth previously included the value of the primary residence, but in 2011, the Commission amended the net worth standard to exclude the value of the investor’s primary residence. Overall, the refinements to the Rule focus as much, or more, on expertise as wealth in terms of qualifying for accredited investor status. There are no deletions from the existing list of accredited investors.

The new categories and refinements, set out in the new Rule that appears below, include: 

-- Confirming that the now ubiquitous form of entity, limited liability companies, with more than US$5 million in assets should be included in the list. 

-- Recognizing the increasing importance of “family offices,” added family offices with at least US$5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act. 

-- A new category for the definition permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to re-evaluate or add certifications, designations, or credentials in the future, and such refinements should be expected. 

-- With respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund are added to the definition.  

-- SEC- and state-registered investment advisers, exempt reporting advisors and rural business investment companies (RBICs) are added to the list of entities that may qualify. 

-- Addition of a new category for any entity, including Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered. 

The amended rule also expands the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.