Today, the Securities and Exchange Commission voted to approve a proposing release for comment that would amend the definition of “accredited investor,” as well as amend the definition of “qualified institutional buyer.”
Amendments to the accredited investor definition have been discussed for many years now. The Dodd-Frank Act in 2010 amended the definition in certain respects and required that the SEC consider the definition. In 2015, the SEC Staff released its Report on the Review of the Accredited Investor Definition, which recommended changes. That was followed by recommendations from the SEC’s Advisory Committee on Small and Emerging Companies, the Investor Advisory Committee, and the annual SEC Government-Small Business Forum sessions. Most recently, as we have blogged about, the SEC solicited comment on the definition in its Concept Release on Harmonization of Securities Offering Exemptions. Despite the almost decade-long dialogue regarding the definition, today’s open meeting was not without controversy.
The changes put forth in the proposing release would have the effect of broadening the potential universe of individuals and entities that might qualify as accredited investors. This seemed to raise concerns among some at today’s meeting regarding investor protection, the supposed lack of transparency of the private markets, and, at the other extreme, whether there is a need for any “wealth” component in such a definition. That said, the proposed amendments to the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications and would leave intact the income/assets tests. The proposed amendments would also add new categories of entities, including a “catch-all” category for any entity owning in excess of $5 million in investments. In particular, the proposed amendments to the accredited investor definition would:
- add new categories to the 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 certain conditions, registered investment advisers and rural business investment companies to the current list of entities that may qualify as accredited investors;
- add a new category for any entity, including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- 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; and
- 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.
In addition, the SEC is proposing to amend the QIB definition to avoid inconsistencies between the entities eligible for accredited investor status and those eligible for QIB status.
The proposed amendments are subject to a 60-day public comment period before they can be adopted by the SEC. The proposing release is available here.