(Now’s the time to update the Investor Questionnaire, if you haven’t already.)

            The Securities and Exchange Commission adopted amendments “to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets.”  The amendments were adopted on August 26, 2020 and became effective on December 8, 2020.  The following discusses the expansion of the term “accredited investor” as it applies to individuals.

            Prior to the amendment, the criteria for determining which individuals could be considered accredited investors focused solely on the net worth or income of those persons or in some cases, their spouses.  The amendments expand the list to include the holders of certain professional designations and others, without regard to their net worth or income.

1.  Individuals holding any of the following designations, in good standing.

            a.         Licensed General Securities Representative (Series 7).

            b.         Licensed Investment Adviser Representative (Series 65)

            c.          Licensed Private Securities Offering Representative (Series 82).

            Note that the rule requires that the individuals must be in “good standing” to be accredited investors.  With respect to “good standing,” the SEC gives the example, “a person seeking accredited investor status by passing the Series 65 exam would also need to be licensed as an investment adviser representative in her state and would need to comply with all state-specific licensing requirements (e. g. paying dues, etc.).”

2.         Individuals who are “knowledgeable employees” of certain private fund issuers (i. e. some hedge funds or private equity funds) may invest in that fund.  A “Private fund issuer” is an issuer that would be an Investment Company, but for an exclusion in either § 3(c) (1) or § 3(c) (7) of the Investment Company Act.   “Knowledgeable employees” are defined in SEC Rule 3c-5 (a) (4) of the Investment Company Act and include directors and officers of the private fund and certain employees.   The SEC cautions the individual “qualifying as an accredited investor based on her status as a knowledgeable employee is an accredited investor only for offerings by the private fund and other private funds managed by their employer.  She cannot use her status as a knowledgeable employee to  qualify as an accredited investor in other offerings.”

3. An individual may qualify as an accredited investor based upon the individual’s status as a family client of a family office. 

            The individual investor must:

a.         Come within the definition of “family client” in Rule 202 (a) (11) (G)-1 under the Investment Advisers Act,

b.         Be a “family client” of a family office that itself qualifies as an accredited investor, and

c.          Have that investment be directed “by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the projected investment.

            In addition to the foregoing the SEC modernized the definition or spouse for 

the purpose of computing joint net worth or income test when making a determination of accredited investor.  The new Rule adds “or spousal equivalent” to the term spouse in the Rule.  Spousal equivalent is defined as “a cohabitant occupying a relationship equivalent to that of a spouse.