Monday, December 21, 2020
ACA ALERT: SEC AMENDS THE ACCREDITED INVESTOR DEFINITION

The Security and Exchange Commission’s (SEC) approved amendments to the “accredited investor” definition, which will become effective on December 8, 2020. The amendments aim to modernize the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. The amendments allow investors to 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.

The amendments:

  • Add new categories of natural persons based on certain professional designations (such as Series 7, 65, or 82 license, or other credentials issued by an accredited educational institution)
  • Expand the definition of accredited investor to include “knowledgeable employee” as defined under Rule 3c-5(a)(4) of the Investment Company Act
  • Clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies to the list of entities that may qualify
  • Add a new “catch-all” category that would allow any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, owning “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 to qualify as accredited investors
  • Add family offices with at least $5 million in assets under management and their family clients to qualify as accredited investors
  • Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors. “Spousal equivalent” is further defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.

ACA Guidance

Hedge fund managers should work with outside counsel to amend offering documents and subscription agreements to reflect the new categories of the amended definition. Compliance professionals are also encouraged to assess if any internal policies and procedures may need to be revised to reflect changes and clarifications provided by the final rule.

ACA COMPLIANCE GROUP

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