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After many years of debate, the U.S. Securities and Exchange Commission (SEC) on Aug. 26, 2020, announced a significant expansion of persons and entities that qualify as "accredited investors" under Rule 501(a) of Regulation D of the Securities Act of 1933. Accredited investors are allowed to purchase securities from issuers in securities offerings that are not required to be registered with the SEC. Native American tribes and entities formed under tribal law are now included within the definition of "accredited investor" provided that: 1) the tribe or such entity owns "investments," as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million, and 2) such entity was not formed for the specific purpose of investing in the securities offered.
For determining whether the $5 million threshold is met, "investments" means shares in mutual funds and public companies, real estate, commodities, and cash and cash equivalents (including bank deposits, certificates of deposit, bankers acceptances and similar bank instruments, and the net cash surrender value of an insurance policy, in each case held for investment purposes).
Under prior securities rules, tribes had the ability to form entities under state law that would have independently qualified as accredited investors. However, many tribes that had not already formed such qualifying entities often missed opportunities as they were presented since such state law-formed entities would not qualify if they were formed for the specific purpose of investing in the securities offered. Under the new expanded rule, as long as a Native American tribe has $5 million of investments it can itself purchase securities as an accredited investor or it may form an entity under tribal law (provided that it is not formed for the purpose of purchasing securities in a specific securities offering) and fund it with $5 million of investments so that it qualifies as an accredited investor.
These long-overdue modifications to the accredited investor definition puts Native American tribes on more equal footing with other market participants and allows access for tribes to a significant segment of the capital markets.
The new rule will be effective 60 days after Federal Register publication.
For more information or questions on the SEC expanded rule, contact the author.
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