The Securities and Exchange Commission (SEC) has introduced significant amendments to the definitions of "accredited investor" under Rule 501 of Regulation D and "qualified institutional buyer" under Rule 144A of the Securities Act of 1933. These updates aim to improve access to private capital markets by expanding eligibility for individuals and entities to participate in exempt offerings.

The changes take effect 60 days after their publication in the Federal Register.

Why the Amendments Matter

The SEC's amendments are part of broader efforts to simplify, harmonize, and modernize the exempt offering framework, allowing greater access to private capital for knowledgeable and financially sophisticated individuals and entities. Exempt offerings are critical to the U.S. economy, facilitating $2.7 trillion in capital raised in 2019 alone, compared to $1.2 trillion from registered offerings.

Key Changes to the Accredited Investor Definition

The revised definition expands eligibility by introducing new categories and clarifying existing ones:

1. Professional Certifications and Designations

Natural persons with specific certifications, such as Series 7, Series 65, or Series 82 licenses, now qualify as accredited investors. These individuals must hold their certifications in good standing.

The SEC has reserved the ability to designate additional professional certifications or credentials in the future. Criteria for such designations include rigorous examinations and the public availability of a list of qualified holders.

2. Knowledgeable Employees

Employees of private funds who meet the definition of "knowledgeable employee" can now participate in private fund investments as accredited investors. This includes executives and employees with at least 12 months of investment-related experience at the fund.

3. Expanded Entity Categories

Several new entity types now qualify as accredited investors:

• Limited liability companies with $5 million in assets.
• SEC-registered and state-registered investment advisers.
• Rural business investment companies (RBICs).
• Entities owning over $5 million in investments, such as Indian tribes and foreign organizations.
• Family offices with $5 million in assets under management and their family clients.

4. Spousal Equivalents

The SEC now allows individuals to pool finances with "spousal equivalents" to meet net worth or income thresholds. A spousal equivalent is defined as a cohabitant in a relationship similar to that of a spouse.

Changes to the Qualified Institutional Buyer Definition

The SEC has similarly expanded the definition of a "qualified institutional buyer" under Rule 144A to include:

• RBICs and limited liability companies meeting the $100 million threshold.
• Any institutional accredited investor not previously specified in Rule 144A that meets the $100 million threshold.

These updates align with the changes to the accredited investor definition, ensuring consistency and expanded market participation.

Implications of the Amendments

Enhanced Market Participation

The expanded definitions will allow a broader range of investors and entities to access private offerings, potentially increasing capital flow to emerging businesses and innovative projects.

Improved Flexibility for Verification

The inclusion of public certifications and designations simplifies the process of verifying accredited investor status for issuers and intermediaries, especially in Rule 506(c) offerings that require verification.

Greater Recognition of Expertise

By recognizing knowledgeable employees and professional certifications, the SEC acknowledges that financial sophistication extends beyond wealth thresholds.