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The U.S. Securities and Exchange Commission (the “SEC”) effectively redefined what it means to be an “accredited investor” and “qualified institutional buyer” after it adopted amendments in Rule 501(a) under Regulation D and Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”).

The SEC issued a statement indicating that it adopted these amendments as part of a larger effort to simplify, harmonize, and improve the exempt offering framework under the Securities Act to encourage capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.

New Definition of Accredited Investor

The amendments made to the definition of “accredited investor” will effectively add a new category permitting natural persons to qualify as accredited investors based on the following:

  • certain professional certifications;
  • certain designations or credentials; or
  • other credentials issued by an accredited educational institution, as designated by the SEC from time to time.

The amendments also include accredited investors, as it pertains to someone investing in a private fund, natural persons who are “knowledgeable employees” of the fund. The amendments also added the term “spousal equivalent” to the definition. As a result, spousal equivalents can now combine their finances with the objective of qualifying as an accredited investor, or investors.

The SEC also made changes to Rule 501(a) to add certain entities to the definition of accredited investor. As a result, limited liability companies with at least $5 million in assets now qualify as accredited investors. This modification also means the following advisers and companies can now qualify as accredited investors:

  • State-registered investment advisers;
  • Exempt reporting advisers, and
  • Rural business investment companies (RBICs).
  • Any entity that owns investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.
  • Family offices with at least $5 million in assets under management.

New Definition of Qualified Institutional Buyer

The SEC amended the definition of qualified institutional buyer in Rule 144A under the Securities Act by adding limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold already contained within the definition.

The SEC also added to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of a qualified institutional buyer, as long as they meet the aforementioned $100 million threshold.

What Comes Next

The SEC amendments will go into effect 60 days following publication of the Adopting Release in the Federal Register. This means issuers need to be proactive and begin updating offering documents, subscription materials, and procedures in anticipation of the final rules going into effect.

Have Questions? Contact Hakim Law Group Today

If you are attempting to decipher the potential ramifications of these SEC amendments, it is in your best interest to discuss with a seasoned business attorney in Los Angeles at the highly reputable Hakim Law Group. We are a premier business law firm with significant experience advising entrepreneurs and clients in complex business matters. This level of diverse legal and business experience is paramount to our boutique approach – which produces more efficient, responsive and, ultimately, more effective results.  Now is the time for action. Contact HLG today at (310) 993-2203 to schedule a consultation or visit to learn more.