On Dec. 18, 2019, the Securities and Exchange Commission (SEC) proposed changes to the definition of “accredited investor” under Regulation D to broaden the definition and identify more effectively the pool of investors that have the credentials to participate in the private capital markets. The definition is a central component of several exemptions from registration, including Rule 506(b) and Rule 506(c) of Regulation D.
With respect to natural persons, the proposed amendments add a new category based on professional credentials. Pursuant to that category, any natural person holding a professional certification or credential from an accredited educational institution recognized by the SEC, such as active Series 7, 65 and 82 licenses, would qualify for accredited investor status. In addition, for purposes of “joint net worth,” the suggested amendment introduces the term “spousal equivalent” so that spousal equivalents may pool their assets to qualify as accredited investors. Such assets need not be held jointly to be included in the calculation, and reliance on the joint net worth standard would not require that the securities be purchased jointly. It is worth noting that the proposal did not adjust current income and wealth requirements for inflation, making it likely that more natural persons would qualify as accredited investors over time.
With respect to private funds, the proposal introduces a new category based on a person’s status as a “knowledgeable employee” of a private fund for purposes of investments in such private fund. Rule 3c-5 of the Investment Company Act of 1940 already allows knowledgeable employees of a private fund, or an affiliated person who manages the investment activities of a private fund, to acquire fund securities without being counted for purposes of the 100-person limit in Section 3(c)(1) of the Investment Company Act or being a “qualified purchaser” for purposes of Section 3(c)(7) of the Investment Company Act.
With respect to entities, the proposal adds to the accredited investor definition registered investment advisers pursuant to Section 203 of the Investment Advisers Act of 1940 or investment advisers registered under state law, as well as rural business investment companies as defined in Section 384A of the Consolidated Farm and Rural Development Act. In addition, the amendments 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 of 1940. Furthermore, the amendments propose 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 and that was not formed for the specific purpose of investing in the securities offered; listed as examples are Indian tribes, labor unions, governmental bodies and funds, and entities organized under the laws of a foreign country (Proposed Rule 501(a)(9)).
The SEC also proposed to amend the definition of “qualified institutional buyer” in Rule 144A to include additional entity types that meet the $100 million threshold, to avoid inconsistencies between the types of entities that are eligible for accredited investor status and those that are eligible for qualified institutional buyer status under Rule 144A.
The SEC is currently accepting public comments on the proposed amendments within 60 days of their publication in the Federal Register. Additional information on the SEC’s proposed amendments can be found here.