General Update for Accredited Investor and Qualified Institutional Buyer

The SEC adopted amendments to the “accredited investor” definition in August 2020. Historically, people who do not meet certain income or net worth tests, regardless of their financial sophistication, were prohibited from investing in many private markets. From here on, individual investors are permitted to participate in private capital markets not only based on income or net worth but also well-defined measures of financial sophistication.

The amendments allow investors to qualify as accredited investors based on professional knowledge, experience, or certifications, in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including allowing any entity that meets an investment test to qualify. The SEC also adopted amendments to update and improve the definition of qualified institutional buyer in Rule 144A under the Securities Act of 1933.

The New Categories

• Natural persons qualified based on certain professional certifications, designations or credentials, or other credentials issued by an accredited educational institution
• Holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. The Commission has the flexibility to reevaluate or add certifications, designations, or credentials in the future
• Concerning investments in a private fund, natural persons who are “knowledgeable employees” of the fund
• LLCs with $5 million in assets
• SEC- and state-registered investment advisers
• Exempt reporting advisers and rural business investment companies (RBICs)
• 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, more than $5 million and that was not formed for the specific purpose of investing in the securities offered;
  
• "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; and
• The term “spousal equivalent” to the accredited investor definition so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors

For those who wish to reference the rule, the amendment to Rule 215 replaces the existing definition with a cross-reference to the definition in Rule 501(a).

The definition of qualified institutional buyer in Rule 144A is now expanded to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition or any institutional investors included in the accredited investor definition provided, if they meet the $100 million threshold.

These amendments become effective 60 days after publication in the Federal Register. Once the new rule is in effect, our question banks will be updated, and the proper text will be added to the Content Updates of most FINRA exams and the NASAA Series 65 and 66 exams.

Sample Questions

Question 1

A registered broker-dealer has lines of business that include acting as an agent for privately placed equity and debt securities. Often the issue amount exceeds $20 million. The firm is medium-sized and currently employs 250 representatives qualified to offer general securities. The firm has a new employee four-month training program with a minimum participation entry qualification requirement of passing the Series 7 examination. This new training class is comprised entirely of people who graduated from college within the past two years and demonstrated an aptitude for the securities industry by taking a third-party administered test. Which of the following statements concerning a new private equity placement is true?

A) Following successful completion of the firm’s training program, a representative’s pay would need to be equal to or exceed $200,000 per year with a strong likelihood that it would continue to be at that level.

B) Following successful completion of the firm’s training program, a representative would qualify to invest in the private offering if able to demonstrate by exam sufficient knowledge of Regulation D and Rule 144.

C) Following successful completion of the firm’s training program, any representative able to prove liquid assets totaling $1 million exclusive of primary residence may make a restricted investment in the offering.

D) Following successful completion of the firm’s training program, each representative would qualify to invest in a private offering.*

Explanation

Participation in a private placement of securities requires, with limited exceptions, that the investor be accredited. That includes those registered representatives who are currently qualified as a Series 7 General Securities Representative.

Question 2

Two Penny Coal, a limited liability company with $500 million invested in investment-grade corporate debt securities was approached by an agent for the issuer of a $1 billion private placement of convertible debentures rated A+ by Standard & Poor’s to judge interest in a $50 million piece. Two Penny Coal investment managers agree to purchase the piece. Which of the following is true following the purchase?

A) The firm may sell the debentures to QIBs without regard to a holding period.*

B) The firm must hold the securities for six months before being offered for sale to any person.

C) The firm may offer to sell the securities to U.S. citizens living abroad without concern of a holding period.

D) The firm must hold the debentures for at least one year.

Explanation

Two Penny Coal is a limited liability company that meets the $100 million threshold of a qualified institutional investor. It may purchase the offered securities and, if it chooses, offer them to another qualified institutional buyer (QIB) without concern of a holding period relying upon Rule 144A.