On December 18, 2019, the Securities and Exchange Commission (“SEC”) proposed changes to the definitions of “accredited investor” and “qualified institutional buyer” that would open private capital markets to new investors. The SEC stated that the proposal would allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications and expanding the list of entities that may qualify as accredited investors by, among other things, adding certain entity investment tests. These proposed changes represent the most significant update to these terms since they were first utilized in federal securities laws in the late 1970s and follow a concept release issued in June 2019 and a staff report issued in December 2015 on the topic.
Currently, an “accredited investor” is defined in Rule 501(a) and includes, among other categories, (i) a person whose individual net worth exceeds $1,000,000 (excluding the value of that person’s primary residence), (ii) a person who had an individual income in excess of $200,000 in each of the two most recent years ($300,000 if combined with a spouse) and has a reasonable expectation of reaching the same income level in the current year and (iii) a person with certain senior roles at the issuer. The proposal preserves the existing categories of persons deemed to be accredited investors and adds the following:
- individuals with certain professional certifications, such as a FINRA Series 7, 65 or 82 license;
- with respect to investments in private funds, individuals who are “knowledgeable employee[s]” of the funds; and
- a “spousal equivalent” concept to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
In addition, the proposal expands the exiting categories of entities deemed to be accredited investors to include:
- limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies;
- any entity, including Indian tribes, owning certain “investments” in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; and
- “Family offices” with at least $5 million in assets under management and their “family clients.”
The proposal also expands the types of entities under the “qualified institutional buyer” definition in Rule 144A. Rule 144A generally provides a registration exemption for resales by qualified institutional buyers. Under the proposed amendments, limited liability companies and rural business investment companies (RBICs) have been added 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, and a new “catch-all” category was added to the definition which follows current practice that would permit institutional accredited investors, of an entity type not already included in the qualified institutional buyer definition, to qualify as qualified institutional buyers when they satisfy the $100 million threshold.
The proposed amendments are open to public comment until mid-March of 2020.