The U.S. Securities and Exchange Commission voted 3-2 on Wednesday to propose amendments to its current definition of an “accredited investor.” The depression-era definition historically limited certain types of private investments to investors with at least $1 million in net assets or at least $200,000 in annual income. The proposed expansion is an effort by the SEC to increase access to capital markets by enabling more Americans to invest in private securities offerings, hedge funds and private-equity funds. According to SEC Chairman, Jay Clayton, “Modernization of this approach is long overdue.”
The proposed amendments to the accredited investor definition would add new categories based on an individual’s professional knowledge, experience, or certifications. In addition, new categories of entities, including a “catch-all” category for entities with more than $5 million in investments, will be incorporated into the new definition. However, as the 3-2 vote indicates, the proposed amendments are not unanimously welcomed and some investor advocates have highlighted that even seasoned investors are not always capable of spotting problems with private offerings.
The amendments remain subject to a 60-day public comment period and we can expect further refinement to the definition of the term "accredited investor" over the coming weeks. Nonetheless, we expect that the broadening of the definition in general will produce at least two primary results: (i) greater flexibility in the offering and subscription process to those who have not previously been able to access private equity investments; and (ii) increased focus and scrutiny on the terms of private offerings and material disclosures related to the offering. The outcome for parties seeking to raise funds for private investment transactions may be a shorter fuse on the time-line to achieving fully-subscribed offerings, while increasing the up-front compliance obligations on content of the private offering materials.
Seyfarth will be monitoring the comment period closely. To the extent that you or your firm are interested in making public comment to the SEC regarding the nuances of this change, contact the author of this article.