Continuing Matt’s article: Now for some fake (or at least misunderstood) news
52,746 words over 166 pages of SEC rules leaves room for plenty of misunderstandings. There were a lot of “hot takes” on this news, and quite a few that were immediately wrong. This post offers a few gentle corrections to some of the misconceptions we’ve already seen.
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First, “an individual’s wealth and net worth are no longer defining factors” according to Hypepotamus. This is not correct. Individual “wealth” (and specifically income or net worth) remains the key defining factor. Not the “only” factor, but the key definition factor for the vast majority of people wondering if they might be accredited. And the wealth requirements did not get lowered.
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Second, many people misunderstood the change to “knowledgeable employees” – in several different ways.
The actual rule is that “knowledgeable employees” of a fund raising capital are now accredited investors with respect to that fund. So, if you work for an investment fund and are a “knowledgeable employee”, you can invest in that fund as an accredited investor.
A knowledgeable employee is (per the Investment Company Act, linked here) an executive officer, general partner, or similar “leader” of the fund, or an employee whose regular duties require him or her to participate in the fund’s investment activities (and is not simply a clerical or administrative role) and that employee has been in place for at least 12 months.
One example mistake is “‘Knowledgeable employees’ with Series 7, Series 65, and Series 82 licenses will now qualify to invest in private, unregistered, and illiquid securities” (per here for example). This mixes things up. The “knowledgeable employee” rule relates to people that work for a private investment fund; it is not directly about holders of securities licenses.
A related but different mistake is saying that this means if you work for an investment fund you are an accredited investor – here, here, or here, for example. It does not. You can invest as an accredited investor in your own fund, but that’s it; you are not accredited to invest in another venture capital fund, or be a more general angel investor, or invest directly any other company making an investment. You are not even “accredited” to invest in the portfolio company that your fund might investing in!
Another mistake (like here) is to say that anyone who works for a fund is now accredited. They are not if their role is clerical/administrative, or they have been in their role for less than a year.
All in all, the “knowledgeable employee” managed to create a lot of confusion over a tiny change.
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Lastly (for now), spouses and spousal equivalents. This interesting rule (a) clarified that “joint net worth” used in the financial thresholds could include both spouses and (b) that “spousal equivalents” were to be treated the same way as spouses.
This does not mean that now “[s]pouses may pool their finances to qualify” as accredited investors (link here). They could do that already based on earlier SEC guidance; this rule just officially confirms the existing practice.
What is new is that “spousal equivalents” receive the same treatment. A spousal equivalent is “same-sex domestic partners as well as opposite sex partners that have determined not to marry even though they live together in a relationship generally equivalent to married couples” according to earlier SEC guidance.
This again is partly unnecessary, as the definition of “spouse” has changed over the last few years anyway. It does, though, mean that, if you co-habit with someone as if they are your spouse but you are not actually married, you can use your combined resources to fulfill the accreditation criteria.
Again, good confusion for a fairly marginal change.
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As ever, the devil of SEC rules is in the details.
If you are raising capital, you need a good securities attorney, and you need to be diligent when creating your fundraising methods, engaging with investors and potential investors, and offering securities.
If you are considering investing in a company, you need to be just as diligent to make sure you are not causing issues for the companies you are investing in.