The U.S. Securities and Exchange Commission (SEC) has recently been taking action to make fundraising easier for small businesses. This past August, the SEC adopted amendments to the accredited investor criteria, and extended relief to the requirements for businesses looking to raise money through equity crowdfunding platforms (such as NetCapital, Crowdfunder, or AngelList). The amendments to the accredited investor definition are permanent, but the relief issued on the Regulation Crowdfunding exemptions are temporary.
We’ve taken a look at these changes and detail how they can affect your business.
Accredited Investor Definition
The accredited investor definition (under Rule 501 of Regulation D of the Securities Act of 1933) hasn’t substantially changed for decades. But with the amendments made in August 2020, several changes permit more individuals and entities to qualify as an accredited investor.
Historically, an individual needed to have a net worth over $1 million, or reflect annual income over $200,000 ($300,000 if married). Similar requirements were in place for an investment entity, where all the owners needed to qualify as accredited investors individually, and the investment entity needed to have assets in excess of $5 million.
The August amendments, however:
- Add a new category that permits more individuals to qualify as accredited investors based on professional certifications and designations
- Initially, the SEC designated any holder of the Series 7, Series 65, and Series 82 licenses to be an accredited investor
- With respect to investments in a private fund, allow individuals who are “knowledgeable employees” of the fund to be an accredited investor
- Add that SEC- and state-registered investment advisers, and exempt reporting advisers may be accredited investors
- Provide clarification that limited liability companies (LLCs) with at least $5 million in assets may be accredited investors
- Add a new category of accredited investor for any entity (including Indian tribes, 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, in excess of $5 million and that wasn’t formed for the specific purpose of investing in the securities offered
- Now include “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, as accredited investors
- Add 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
Temporary Crowdfunding Relief
On May 7, 2020, the SEC published amendments to Regulation Crowdfunding rules to provide relief from certain regulatory reporting requirements in the original crowdfunding exemption rules. The relief primarily eases timing constraints of an Offering, as well as the form and timing of financial statements made available to investors in an Offering.
The temporary relief is effective now through September 1, 2021. Technically, the temporary rules apply to securities offerings initiated under Regulation Crowdfunding between May 4, 2020 and February 28, 2021. Amendments include:
- Offers are permitted after the filing of an Offering statement, but financial statements of the issuer may initially be omitted
- Existing rules require financial statements be included with initial Offering statement
- For Offerings of more than $107,000 and not more than $250,00 in a 12-month period, Offering materials are required to include financial statements of the issuer and certain information from the federal income tax returns of the issuer
- Existing rules require financial statements of the issuer be reviewed by an independent public accountant
- Permits the closing on investor commitments as soon as binding commitments reach the target Offering amount
- Existing rules required a 21-day window for the offering to stay open
Conclusion
The SEC acknowledged the financial hardships felt by small businesses due to the COVID-19 pandemic. The changes to the accredited investor definition stemmed from a June 2019 request for public comment from the SEC, so the wheels were already in motion prior to the pandemic. However, it’s easy to assume the SEC was motivated by the liquidity needs of small businesses after the COVID-19 outbreak, and took action to make access to funding easier. While these changes aren’t expected to have a monumental impact on capital formation, these targeted amendments should still positively impact access to capital for small businesses.
