The SEC recently adopted changes to its definition of an “Accredited Investor.” This is good news for private fund managers since it expands the type of people and entities that will be eligible to invest in private funds. A private fund’s pool of potential investors under Reg D may now include the following investor types:
- Any type of legal entity recognized under IRS Code 501c(3) with total assets in excess of $5 million.
- After meeting the income test, any natural person whose individual, joint, or with a spousal equivalent has a net worth over $1 million (excluding the primary residence).
- Any entity with investments in excess of $5 million (as long as not formed specifically for the purpose of participating in the offering).
- Any person holding a valid professional certification from a self-regulatory organization such as FINRA or the NFA (SEC will post those qualifying designations on its website).
- Any “knowledgeable employee” as defined under Rule 3c-5(a)(4) of the Investment Company Act.
- A “family office” as defined under Rule 202(a)(11)(G)-1 of the Advisers Act that has assets over $5 million and was not formed specifically to invest in the securities offered in the fund. This also includes those “family clients” whose investments are directed by such family office.
Rule 144A, which defines a “qualified institutional buyer,” was also updated in a similar fashion regarding entity types that now qualify under the Rule.
The SEC did not amend the numerical criteria, so outside of the new investor types and criteria described above, an individual seeking to qualify as an accredited investor must still meet the same income and net worth requirements under the original guidelines. This requires an annual income of at least $200,000 for the past two years or $300,000 in joint income with an expectation to continue at this threshold of income. In addition, the net worth of the investor must be over $1 million, which excludes the value of a primary residence.
The bottom line is that the SEC has just made it easier for an investor to qualify to invest in a private fund offered under Reg D. This is welcome news for private funds looking to raise capital. Placement agents that solicit investors on behalf of private funds may now expand their networks and have a larger pool of investor candidates to consider.
View SEC Release Nos. 33-10824; 34-89669, “Amending the ‘Accredited Investor’ Definition,” which becomes effective 60 days after publication in the Federal Register (TBD).