Pastore & Dailey has been retained, in connection with an SEC investigation by one of the largest private equity firms in the world, that allows investments by retail investors. Pastore & Dailey attorneys have served as Chief Compliance Officer at multi-billion-dollar investment advisers and two of the largest banks in the world. Thus, the firm is uniquely positioned to handle this and similar matters. Pastore & Dailey attorneys have also served as General Counsel and in-house counsel of some of the largest Wall Street firms and have served as regulators at the Securities Exchange Commission (SEC), New York Stock Exchange (NYSE) and the Financial Industry Regulatory Authority (FINRA).
Pastore & Dailey has been retained by a leading cryptocurrency firm specializing in decentralized finance in connection with regulatory and compliance matters in the Cayman Islands and internationally. Pastore & Dailey has substantial experience and the burgeoning business of cryptocurrency having represented in 2020 a cryptocurrency mining company, and defended a Department of Justice (DOJ) investigation into an initial coin offering.
Pastore & Dailey attorneys have served as Chief Compliance Officer’s at multi-billion-dollar investment advisers and two of the largest institutional banks in the world. Thus, the firm is uniquely positioned to handle this and similar matters.
Recently, Pastore & Dailey advised clients on a unique issue related to accredited investors. The client, an SEC registered investment advisor, asked Pastore & Dailey whether the death of an accredited investor had any legal implications for the funds it manages when the accredited investor bequeathed his investment to a non-accredited investor. The simple answer is no.
Under the securities laws, the term “sale” is defined as to include every contract of sale or disposition of a security or interest in a security, for value. Additionally, the term “offer to sell”, “offer for sale”, or “offer” is defined to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. 15 U.S.C. § 77b(a)(3).
Thus, an involuntary transfer by operation of law, such as a divestment of an investment upon death to beneficiaries will not be considered a “sale” or an “offer to sell.” Therefore, the recipient is not required to be an accredited investor.
Special Rule for Family Offices
Pastore & Dailey also advised the client on the legal implications of this unique circumstance when the accredited investor is a family office.
An accredited investor now includes any family office as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (“Advisers Act”): (i) with assets under management in excess of $5,000,000, (ii) that is not formed for the specific purpose of acquiring the securities offered, and (iii) whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment. 17 C.F.R. § 230.51(a)(12).
The accredited investor definition was also expanded to include a family client, as defined in Rule 202(a)(11)(G)-1 under the Advisers Act. A family client as defined in Rule 202(a)(11)(G)-1 is: (i) Any family member; (ii) Any former family member; or (vi) Any estate of a family member, former family member or key employee. 17 C.F.R. § 275.202(a)(11)(G)-1(d)(4).
In the Adoption Release, the SEC explained that it is not excluding from the accredited investor definition a beneficiary that temporarily qualifies as a family client under the family office rule. Thus, a beneficiary who receives the stocks from the decedent will be considered a family client for purposes of the accredited investor definition for exactly one year. SEC Release No. 33-10824, August 26, 2020.
There are limitations to this rule. Although a beneficiary would not be required to unwind any of the securities received in an involuntary transfer, the beneficiary would not be considered an accredited investor in connection with the purchase of additional securities, unless the beneficiary qualified as an accredited investor on another basis.
In conclusion, the requirement that an offering or sale of restricted securities be made to an accredited investor applies at the “time of sale of the securities to that person.” Thus, an involuntary transfer such as a divestment of shares to a beneficiary upon death of the accredited investor should not pose a problem for a testator and their funds.
As the requirement that an offering or sale of restricted securities be made to an accredited investor applies at the “time of sale of the securities to that person,” a involuntary transfer, such as a divestment of shares to a beneficiary upon death of the accredited investor should not pose a problem for an RIA and its funds.
 SEC Expands the “Accredited Investor” and “QIB” Definitions and the Permitted Scope of “Testing the Waters.” Proskauer. September 9, 2020. https://www.proskauer.com/alert/sec-expands-the-accredited-investor-and-qib-definitions-and-the-permitted-scope-of-testing-the-waters#_ftnref3
Charitable organizations and their donors should be aware that the $300 deduction made available under the CARES Act expires at the end of 2020. Because this addition to the standard deduction has had such an appreciable and positive effect on charitable donations so far this year, eligible organizations might timely remind potential donors of this opportunity to support their missions.
The data suggest that many donors, particularly smaller donors, have increased giving in 2020 because of the provision in the CARES Act, P.L. 116-136,1 which provides a $300 above the line charitable deduction to taxpayers who use the standard deduction and do not itemize. 2 While first quarter donations of less than $250 were up 5.8% year on year in the first quarter of 2020, they rose 19.2% at the end of the first half of the year, strongly indicating that the CARES Act, which went into effect on March 27, incented smaller donors substantially more than larger donors. Figure 1 illustrates the first quarter and first half donor data.
|Q1 2020||+ 5.8%||-2.2%||-7.4%|
|Q1 & Q2 2020||+19.2%||+8.1%||+6.4%|
These data further suggest that small donors would increase their giving were the ceiling for qualified charitable contributions to be raised.
Nearly nine out of ten taxpayers now take the standard deduction and no longer itemize since the Tax Cuts and Jobs Act, P.L. 115-97 increased the standard deduction, nearly doubled the standard deduction, and eliminated or restricted many itemized deductions for years 2018 through 2025.
The deductibility of qualified charitable contributions may be further limited by each donor’s circumstances and they should be advised to consult with their professional advisors. Organizations which receive donations of $250 or more from any donor in a calendar year are obliged to provide that donor timely written acknowledgment of the donation that complies with Reg. §§ 1.170A-16(b).
These notes are provided to illustrate general principles only. They are not legal or tax advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action.
1. Fundraising Report January 1, 2020- June 30, 2020, Association of Fundraising Professionals Foundation for Philanthropy [downloadable from my server here until December 20, 2020]
2. See, §2204 of the CARES Act, referring to donations made under this provision as “qualified charitable contributions.” §2205(a)(3)(A)(i) of the Act further limits the deduction to contributions “paid in cash during calendar year 2020 to an organization described in section 170(b)(1)(A) of such Code.”