On December 18th, the SEC proposed amendments to the definition of accredited investor, which is one of the principal tests for who is eligible to participate in private capital markets. The changes would update and improve the definition to identify more effectively those institutional and individual investors who have the knowledge and expertise to participate in these markets. By amending this and other related definitions, more investors would be able to participate in private offerings through the addition of new categories of natural persons that may quality as accredited investors based on their professional knowledge, experience, or certifications. The proposal would also expand the list of entities that may qualify as accredited investors by allowing any entity that meets an investments test to qualify, among other ways. Specifically, the changes focus on the definition of "accredited investor" in the SEC's rules and the definition of "qualified institutional buyer" in Rule 144A under the Securities Act of 1933.
The amendments stem from a concept release that the SEC issued in June 2019 on potential methods of harmonizing, simplifying, and improving the exempt framework under the Securities Act as to promote capital formation and expand investment opportunities while maintaining appropriate investor protections. In this concept release, the SEC requested public comments on possible ways of amending the accredited investor definition, which is a central component of several exemptions from registration, such as Rules 506(b) and 506(c) of Regulation D. This definition also plays a key role in other federal and state securities laws contexts. After considering the public opinions a well as recommendations from the SEC’s Small Business Capital Formation Advisory Committee, the SEC’s Investor Advisory Committee, and the annual SEC Government-Business Forum on Small Business Capital Formation, these changes were proposed as an initial step in a broader effort to harmonize and improve the exempt offering framework.
In particular, the proposed amendments would:
- add new categories to the accredited investor definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65, or 82 license, or other credentials issued by an accredited educational institution
- with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund
- add limited liability companies that meet particular conditions, registered investment advisers, and rural business investment companies (RBICs)) to the current list of entities that may qualify as accredited investors
- add a new category for any entity owning “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act) in excess of $5 million. The entity cannot have been formed for the specific purpose of investing in the securities offered. Included in these potential entities would be Indian tribes.
- add “family offices” with at least $5 million in assets under management and their “family clients” (as each term is defined under the Investment Advisers Act)
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors
The proposed amendments to the “qualified institutional buyer” definition in Rule 144A would add limited liability companies and RBICs to the types of entities that are eligible for qualified institutional buyer status if they meet the $100 million in securities owned and investment threshold in the definition. Finally, the amendments would add a “catch-all” category that would permit institutional accredited investors under Rule 501(a) to qualify as qualified institutional buyers when they satisfy the $100 million threshold. This would apply to entity types not already included in the qualified institutional buyer definition.
The SEC seeks public comment on these new rules. The public comment period will be open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
Sources:
SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments (www.sec.gov)
SEC Release No. 33-10734 - Amending the “Accredited Investor” Definition (www.sec.gov)
