Member Perspective: “The Impact of SEC’s Expanded Definition of “Accredited Investor” on EB-5 Offerings”

08.31.20 | Research & Analysis

This is a member perspective and the views of the author are their own and do not necessarily reflect the views or position of IIUSA.

By Kathleen Harrison, Associate, Baker Donelson and Robert Divine, Shareholder, Baker Donelson

Last week, the Securities and Exchange Commission (SEC) expanded slightly who can qualify as “accredited investors.” Many EB-5 issuers use securities registration exemptions that allow subscription and even solicitation of investors in the U.S. and elsewhere as long as the investors are “accredited,” and the current definition focuses on the investor’s (or investor’s and spouse’s) net worth or income. In about 60 days, the expanded rule will include investors with certain U.S. securities licenses (not often held by EB-5 investors), regardless of net worth, and it will let investors qualify based on net worth not only with a spouse but also with a cohabiting “spousal equivalent.”

U.S. securities rules require registration of a securities offering – one that depends on the performance of others – unless an exemption applies. Many offerings rely on Regulation S applicable only to investors who are not in the U.S. and are not U.S. persons. For investors who may be U.S. persons or located in the U.S., and possibly for investors globally, most offerings rely on Section 506(c) of Regulation D, which allows general solicitation but limits purchases to investors who show the issuer that they are accredited. (Increasingly less frequently, another alternative is Section 506(b) which does not allow general solicitation but also does not require verification of an investor’s accreditation.) EB-5 issuers, therefore, are familiar with the existing “accredited investor” definition, which uses wealth (specifically, income or net worth) as a proxy for financial sophistication. The SEC’s announced changes broaden the scope of investors who qualify as accredited investors and may be eligible to participate in such offerings as a result.

The SEC’s expanded definition includes natural persons who hold “in good standing one or more professional certificates or designations or credentials from an accredited education institution that the SEC has designated as qualifying an individual for accredited investor status.” Initially, the SEC issued an order that persons holding Financial Industry Regulatory Authority Inc. Series 7, 65, or 82 licenses will qualify as accredited investors under this category, regardless of their net worth or income….Continue Reading