By: Peter D. Singh Jr.

Securities laws and regulations are important guidelines and safeguards for any company looking to raise money selling interests, and for any investor trying to buy in. The Securities and Exchange Commission (SEC) recently adopted a new definition of “accredited investor”, which is important because the definition determines who can invest in private securities offerings. Eligibility has always included specific net worth and income tests, but this new definition adds eligibility based on professional knowledge or designations, experience, or certifications.

Why do we care about investors being accredited?

In order for the sale of stock to be exempt from the drawn-out process of registering the securities, companies rely on certain exemptions and exceptions to the registration requirements. Here is a link to an article/video we did about Rule 506B of Regulation D, for instance: https://fourscorelaw.com/rule-506b-of-regulation-d/

Private placement offerings allow only a limited number of non-accredited investors in any one deal, and there are caps on how much of their net worth or income they can invest in any given opportunity, which is the greater of 10% of their net worth or their income, subject further to certain annual caps with things like crowdfunding. This exemption from full-fledged filing is important for companies that are raising money by selling capital (issuers), but want to do so without the burdensome disclosure requirements of a registered offering.

What was the old way of determining accredited investor status?

Prior to this amendment, someone was only considered an accredited investor if they had a net worth of at least $1,000,000 not including the value of the primary residence, or if they made at least $200,000 per year. If an investor was legally married to a spouse, their incomes could be combined to reach a $300,000 threshold.

How does the expanded definition change this?

The redefined accredited investor thresholds will help issuers count less investors as non-accredited of those investors who have financial savvy but don’t necessarily have liquid financial means to count toward the net worth and income requirements. There are three new ways for an individual to qualify: (1) have a specialized license that demonstrates financial savvy, (2) be a “knowledgeable employee”, or (3) be a spousal equivalent (instead of just an actual spouse) with someone where you, together, satisfy the requirements.

People (natural persons/individuals) with Series 7 (Licensed General Securities Representative), Series 65 (Licensed Investment Adviser Representative), or Series 82 (Licensed Private Securities Offerings Representative) licenses administered by the Financial Industry Regulatory Authority, Inc. (FINRA) now qualify as accredited investors just by virtue of holding these licenses. Issuers can now run a FINRA BrokerCheck (https://brokercheck.finra.org/) to verify any financial industry licensure or status. For flexibility, the SEC notes that other credentials may be added and considered as time goes on. Besides holding certifications or designations, a person could meet “knowledgeable employee” status if they work for a fund as a high-level exec or qualifying investment personnel. This expanded definition allows people that may not meet the net worth and income limits, but have proven experience with investment, to invest as much as they’re comfortable risking. Besides the professional designations and knowledgeable employee status, the net worth and asset criteria now include “spousal equivalents” (defined as a “cohabitant occupying a relationship like a spouse”) so their assets count toward the requirements, even if the securities are not purchased jointly, but individually instead.

This new definition will be effective 60 days after publication of the amendment in the Federal Register, so it will apply to offerings in early November and onward.

How will this benefit companies, if at all?

This change should increase the number of investors that have access to private investment opportunities, reconcile how the revised definition of “accredited investor” comports with other thresholds like sophistication.

Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.