On August 26, 2020, the SEC adopted amendments to the definition of “accredited investor.” Many private capital market offerings, including securities offerings conducted pursuant to Rule 506(b) and Regulation D under the Securities Act of 1933, along with certain offerings under state securities laws, are limited to accredited investors. These private offerings are sometimes higher risk than investments available in traditional markets. The amendments expand the definition to allow an individual investor who meets a financial sophistication test to qualify as an accredited investor. An individual may now qualify as an accredited investor based on professional knowledge, experience or certification. Previously, an individual had to meet income or net worth thresholds to be an accredited investor. The amendments also add to the entities that may now qualify to participate in private offerings.
In explaining its rationale for expanding the definition, the SEC said it does not believe wealth should be the only means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Underlying this change is the SEC’s theory that purportedly sophisticated investors are not in need of the same level of investor protections otherwise available under the securities laws and regulations. Advocates for investor rights have criticized the SEC for failing to address the fact that many individual investors who already qualify as accredited investors do not have the financial sophistication and access to information to understand and assess the risks of many private offerings. PIABA, for example, sent the SEC a comment letter in May, emphasizing the SEC’s primary objective of protecting investors and warning that the expanded definition undermines investor protection. PIABA’s comment letter is available here. The SEC’s Final Rule is available here.