SEC grows pool of potential startup investors by expanding “accredited investor” definition

On Aug. 26, 2020, the Securities and Exchange Commission (SEC) amended the definition of “accredited investor” under Rule 501(a) of Reg D to expand the scope of those who may qualify as accredited investors. This is great news for startups who are looking to raise capital through private placements because it will increase the pool of eligible investors who do not require a costly private placement memorandum.

The amendment goes into effect on Nov. 24, 2020, and the portions which are most relevant to startups are as follows:

  1. Persons who hold certain professional certifications, designations, or certain credentials designated by the SEC may qualify as an accredited investor. Currently, the SEC has designated persons holding the Series 7 (securities products traders except for commodities and futures), Series 65 (investment advisors), and Series 82 (private securities offerings representative) licenses as accredited investors. All of these licenses are administered by the Financial Industry Regulatory Authority (“FINRA”).
  2. Clarification that a limited liability company with at least $5 million in assets may qualify as an accredited investor.
  3. The addition of “spousal equivalent” for the purposes of pooling assets and annual income to satisfy minimum income and net worth requirements.
  4. The addition of SEC- and state-registered investment advisers, exempt reporting advisers, and rural business-investment companies (RBICs) to the list of entities that may qualify as an accredited investor.
  5. The addition of a new catch-all definition of entities with $5 million in investments and not enumerated elsewhere, so long as such entities were not formed for the specific purpose of making the investment. The intention being that Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, may now qualify as accredited investors.
  6. The addition of “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act, to the list of entities that may qualify as an accredited investor.

Although the amendment increases the pool of potential investors in your startup, please remember to undertake the proper due diligence of each of your potential investors to confirm whether they qualify as an accredited investor under Reg D.