SEC Changes to Definition of “Accredited Investor” Affect Irish Funds Sold to US Residents14 September 2020
Ireland is a jurisdiction that is synonymous with alternative investment funds (“AIFs”); it is the largest hedge fund domicile in Europe and the first jurisdiction to provide a regulated framework specifically for the hedge funds industry. As further discussed in our Guide to International Fund Distribution in the United States (“Guide”), Irish domiciled AIFs and UCITS are often sold to residents of the United States that are deemed “accredited investors”.
On August 26, 2020, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to the definition of “accredited investor” to add new categories of investors (both for individuals and entities) and codify longstanding SEC staff interpretations to improve the definition of accredited investor in order to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private funds.
All Irish domiciled funds that offer and sell shares to U.S. residents will be affected by this recent change.
Under the U.S. federal securities laws, only persons who are “accredited investors” may participate in certain securities offerings that are not registered with the SEC. One reason these offerings are limited to accredited investors is to ensure that all investors participating in the offering (e.g. subscribing for shares of an Irish fund) are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.
Currently, an accredited investor, in the context of a natural person, includes anyone who: (i) earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR (ii) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). There are other current categories of accredited investors, including (among others): (i) any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, (ii) any entity in which all of the equity owners are accredited investors; and (iii) any corporation, limited liability company, partnership, business trust, or tax-exempt 501(c)(3) organization that has greater than $5,000,000 in total assets.
The amendments add the following categories to the definition of accredited investor:
- Individuals with Professional Certifications/Designations and Other Credentials. The amendments add natural persons in good standing who hold certain professional certifications, designations or credentials from accredited educational institutions designated by the SEC. The SEC’s initial designations are individuals holding the Series 7, Series 65 and Series 82 licenses.
- Knowledgeable Employees of Private Funds. The amendments add “knowledgeable employees” (as defined under the Investment Company Act of 1940) as accredited investors for purposes of investing in related private fund offerings.
- Pooled Finances for Spousal Equivalents. The amendments allow the inclusion of income from spousal equivalents (i.e., a cohabitant occupying a relationship generally equivalent to that of a spouse) in determining the joint net worth and joint income thresholds contained in the accredited investor definition.
- Entities Satisfying a $5 Million “Investments-Owned” Test. The amendments add a new catch-all category for entities that own more than $5 million of investments (as defined under the 1940 Act). This category is specifically intended to capture all new and existing entity types not already contemplated by the accredited investor definition (including Indian tribes, governmental bodies, and entities formed under foreign jurisdictions, among others).
- Certain Family Offices and Family Clients. The amendments add family offices (as defined in the Investment Advisers Act of 1940): (i) with more than $5 million in assets under management; (ii) that are not formed for the purpose of investing in the offered securities; and (iii) whose prospective investments are directed by individuals who have knowledge and experience in financial and business matters.
- SEC- and State-Registered Investment Advisers and Exempt Reporting Advisers. The amendments add investment advisers that are registered with the SEC or a state, as well as exempt reporting advisers.
- Limited Liability Companies with Total Assets Exceeding $5 Million. The amendments add limited liability companies having total assets exceeding $5 million, codifying a long-standing staff position that limited liability companies otherwise satisfying the requirements of the accredited investor definition qualify as accredited investors.
The amendments will go into effect 60 days after publication in the Federal Register.
Irish Funds that offer and sell shares to U.S. residents on a “private placement” basis should review and update their offering and subscription materials to be compliant with the new accredited investor definition.
(Irish Funds North America Distribution Working Group)