The Securities and Exchange Commission proposed revisions to its definition of “accredited investor” to enable more natural persons and legal entities to participate in sales of certain securities exempt from registration under US securities law. As proposed, natural persons would be able to participate in qualified exempt securities offerings if they had requisite certifications, professional knowledge or experience, while newly eligible legal entities would include any entity owning more than US $5 million in investments. (Click here to access a current list of persons qualifying as accredited investors in SEC Rule 501(a).)
Initially, natural persons holding a Series 7 (general securities representative), 65 (investment advisor representative) or 82 (private securities offerings representative) license or other credentials from an accredited educational institution would additionally qualify as an accredited person under the SEC’s amendments, as would designated “knowledgeable employees” of a private fund regarding investments in the fund. Newly-designated accredited investors would also initially include limited liability companies that meet certain conditions as well as registered investment companies and rural business investment companies. Family offices holding at least US $5 million in assets would also qualify as accredited investors as proposed.
In its proposal, the SEC solicited comments suggesting it might also consider even a more expansive expansion of accredited investor to include any natural person advised by a registered investment advisor.
In adopting its proposal, the SEC acknowledged that adopting “an overly broad definition [of accredited investor] could potentially undermine important investor protections and reduce public confidence in this vital [private securities] market.” However, the SEC also expressed concern that maintaining a narrow definition precludes participation in investment opportunities by persons “where there may be adequate investor protection given factors such as that investor’s financial sophistication, net worth, knowledge and experience in financial matters, or amount of assets under management.”
Qualified companies are authorized to sell new securities in the United States under various exemptions to securities registration requirements included in the SEC’s Regulation D, provided such sales are either principally or exclusively sold to accredited investors (depending on the exemption. Click here for background on Sections 506(b) and 506(c) of SEC Regulation D.)
The SEC also proposed amendments to expand its definition of “qualified institutional buyers,” to enable more types of non-natural persons to purchase certain restricted, unregistered or control securities pursuant to another exemption from SEC registration requirements. (Click here to access background regarding SEC Rule 144A.)
The SEC’s proposals follow its publication of a concept released on the same topics earlier this year. (Click here for background in the article “SEC Seeks Comments on Private Offering Harmonization Initiative” in the June 23, 2019 edition of Bridging the Week.)
Comments on the SEC’s proposals will be accepted for 60 days following their publication in the Federal Register.
My View: In a separate statement, SEC Commissioner Robert Jackson expressed concern that the SEC’s proposal “does not take seriously the investor protection concerns present in private markets.” (Click here to access Commissioner Jackson's full statement.) However, this concern elevates the SEC’s current emphasis on financial ability as the touchstone of who may purchase private securities over demonstrable possession of financial markets acumen. However, where there is less disclosure – such as in private securities offerings as opposed to registered offerings – possessing financial markets knowledge, not wealth, is likely more important. The SEC’s proposals recognize this and hopefully, in at least substantial form, will be adopted.