Reg D safe harbor - SEC expands definition of “accredited investor”

On August 26, 2020, the SEC adopted amendments to Rule 501(a) under the US Securities Act of 1933. This rule defines the term "accredited investor" for purposes of the Regulation D "safe harbor".

Investment managers should consider updating the subscription agreements of private fund clients that make use of Regulation D in order to reflect the expanded definition.

What’s changed?

Under the Amended Rule:

• a natural person will be an accredited investor based on his or her:

  • professional certifications or designations
  • credentials from an accredited educational institution or
  • status as a private fund's "knowledgeable employee”

• a natural person will be able to aggregate his or her income or net worth with that of his or her "spousal equivalent" to determine whether it meets the necessary financial thresholds

• "family offices" and their respective "family clients" are added as new categories of accredited investors, provided they meet certain requirements

• an entity will be an accredited investor under the amended definition if it is (a) an SEC-registered investment adviser, (b) a state-registered investment adviser, (c) an exempt reporting adviser or (d) a rural business investment company

• a "catch-all" entity category has been added to capture all entity types not currently included in the current definition of “accredited investor” (and any created in the future) so long as the entity satisfies an "investments" test and was not formed for the specific purpose of acquiring the securities offered.

When does this change come in?

The new, expanded, definition will become effective 60 days following its publication in the Federal Register.

How do I find out more?

For more information please either see the article published by Seward & Kissel, our alliance firm for hedge fund and asset management work, or speak to your usual contact at Simmons & Simmons.