Conformed to Federal Register Version SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 230 and 240 [Release Nos. 33-10824; 34-89669; File No. S7-25-19] RIN 3235-AM19 Accredited Investor Definition AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: We are adopting amendments to the definition of “accredited investor” in our rules to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition. The amendments are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933. We are also adopting amendments to the “qualified institutional buyer” definition in Rule 144A under the Securities Act to expand the list of entities that are eligible to qualify as qualified institutional buyers. DATES: This final rule is effective December 8, 2020. FOR FURTHER INFORMATION CONTACT: Jennifer Zepralka, Office Chief, or Charlie Guidry, Special Counsel, Office of Small Business Policy, at (202) 551-3460, Division of Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at (202) 551-6999, Investment Adviser Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 230.144A (“Rule 144A”), 17 CFR 230.163B (“Rule 163B”), 17 CFR 230.215 (“Rule 215”), and 17 CFR 230.501 (“Rule 501”) of 17 CFR 230.500 through 230.508 (“Regulation D”) under the Securities Act of 1933 (“Securities Act”);1 and 17 CFR 240.15g-1 (“Rule 15g-1”) under the Securities Exchange Act of 1934 (“Exchange Act”).2 TABLE OF CONTENTS I. Introduction and Background II. Final Amendments to the Accredited Investor Definitions A. Proposed Amendments B. Final Amendments 1. Natural Persons a. Natural Persons Holding Professional Certifications and Designations or Other Credentials b. Knowledgeable Employees of Private Funds 2. Entities a. Registered Investment Advisers b. Rural Business Investment Companies c. Limited Liability Companies d. Other Entities Meeting an Investments-Owned Test e. Certain Family Offices and Family Clients 3. Permitting Spousal Equivalents to Pool Finances for the Purposes of Qualifying as Accredited Investors 4. Notes to 501(a) a. Note to Rule 501(a)(5) b. Note to Rule 501(a)(8) 5. Amendment to Rule 215 6. Other Comments III. Amendments to Securities Act Rule 163B and Exchange Act Rule 15g-1 IV. Discussion of the Final Amendments to the Qualified Institutional Buyer Definition A. Proposed Amendments B. Final Amendments V. Other Matters 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. VI. Economic Analysis A. Introduction and Broad Economic Considerations B. Baseline and Affected Parties C. Anticipated Economic Effects 1. Potential Benefits to Issuers a. More Efficient Capital Raising Process in Exempt Offerings b. Facilitate Capital Formation by Expanding the Pool of Investors in Exempt Offerings c. Increase Liquidity of Securities Issued in Unregistered Offerings d. Other Benefits 2. Potential Benefits to Investors 3. Potential Costs to Issuers 4. Potential Costs to Investors 5. Variation in Economic Effects 6. Efficiency, Competition, and Capital Formation 7. Alternatives a. Inflation Adjustment of Financial Thresholds b. Investment Limits c. Geography-Specific Thresholds d. Including Additional Categories of Natural Persons and Entities VII. Paperwork Reduction Act VIII. Final Regulatory Flexibility Analysis IX. Statutory Authority I. Introduction and Background On December 18, 2019, the Commission proposed amendments to the definition of “accredited investor” in Securities Act Rules 215 and 501(a) and to the definition of “qualified institutional buyer” in Rule 144A.3 The proposed amendments were intended to update and improve the definitions to identify more effectively institutional and individual investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act. 3 Amending the “Accredited Investor” Definition, Release Nos. 33–10734; 34–87784 (Dec. 18, 2019) [85 FR 2574 (Jan. 15, 2020)] (“Proposing Release”). The Proposing Release and the amendments we are adopting are part of a broader effort to simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.4 As we noted in the Proposing Release, these amendments will provide a foundation for our ongoing efforts to assess whether the exempt offering framework, in its component parts and as a whole, is consistent, accessible, and effective for both issuers and investors. The Securities Act contains a number of exemptions from its registration requirements and authorizes the Commission to adopt additional exemptions. As the Commission has previously noted, the regulatory framework for exempt offerings has evolved, and the significance of the exempt securities markets has increased both in terms of the absolute amount raised and relative to the public registered markets.5 In 2019, registered offerings accounted for $1.2 trillion (30.8 percent) of new capital, compared to approximately $2.7 trillion (69.2 percent) that we estimate was raised through exempt offerings.6 Of this, the estimated amount of capital reported as being raised in offerings under Rule 506(b) and 506(c) of Regulation D was approximately $1.56 trillion. The accredited investor definition is a central component of the Rule 506 exemptions from registration and plays an important role in other exemptions and other 4 See Concept Release on Harmonization of Securities Offering Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June 26, 2019)] (“Concept Release”) and Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Release Nos. 33– 10763; 34–88321 (Mar. 4, 2020) [85 FR 17956 (Mar. 31, 2020)] (“Access to Capital Proposing Release”). 5 See Concept Release at 30465. See also Access to Capital Proposing Release at 17957. 6 Unless otherwise indicated, information in this release on offering amounts is based on analyses by staff in the Commission’s Division of Economic Risk and Analysis (“DERA”) of data collected from SEC filings. federal and state securities law contexts. Qualifying as an accredited investor, as an individual or an institution, is significant because accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, including certain investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds. The final rules are tailored to permit investors with reliable alternative indicators of financial sophistication to participate in such investment opportunities, while maintaining the safeguards necessary for investor protection and public confidence in investing in areas of the economy that disproportionately create new jobs, foster innovation, and provide for growth opportunities. Historically, the Commission has stated that the accredited investor definition is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act’s registration process unnecessary.”7 Prior to the adoption of these final rules, in the case of individuals, the accredited investor definition has used wealth—in the form of a certain level of income or net worth—as a proxy for financial sophistication. However, as stated in the Proposing Release, we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways. These include the ability to 7 See Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan. 30, 1987)]. See also SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953) (taking the position that the availability of the Section 4(a)(2) exemption “should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering’”). assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss.8 Accordingly, the final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity. The amendments we are adopting are