Goosmann Law works often with start-ups, private equity funds, and venture capital funds, and, lately, numerous questions have arisen from clients and acquaintances regarding the new SEC regulations on “knowledgeable employees.”
Individual investors who are considered “knowledgeable employees” within the fund can be considered accredited investors. A “knowledgeable employee” is defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940 as “an executive officer, director, trustee, general partner, advisory board member, or similar, of the private fund or an affiliated management person, or an employee of the fund or ‘an affiliated management person’ who participates in investment activities as part of his or her regular functions or duties.”
Employees who participate in the investment activities of the fund or other private funds managed by the affiliated management person or by their employer also count as accredited investors. The employee can only invest, however, in the offerings by the private fund or other funds managed by their employer. According to the SEC, the knowledgeable employee “cannot use her status as a knowledgeable employee to qualify as an accredited investor to invest in other offerings.”
Therefore, an employee of a private fund cannot invest in other start-ups that are not managed by that private fund.
Newly qualified accredited investors under the new regulations include LLC’s with revenue of over $5M, registered investment advisors, rural business investment companies, certain family offices with over $5M under management, and Indian tribes and… federal, state, territorial, and local government bodies, … and entities organized or under the laws of foreign countries.
These amendments were effective December 8, 2020.