On December 18, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments that would expand the definitions of “accredited investor” and “institutional buyer” in Rule 144A, including by adding new categories of individuals and entities that would qualify. These definitions determine under many SEC rules which individuals and entities may participate and invest in in private placement offerings, including under Rule 506(b) and 506(c) of Regulation D.
Significantly, the proposed amendments do not change the basic definitions for investors, which for individuals require income of $200,000 in the past two years (or joint income of $300,000) or a net worth of greater than $1 million, excluding a primary residence.
Rather, the proposed amendments to the accredited investor definition would add new categories of (i) qualifying individuals based on financial sophistication as measured by professional knowledge, experience, certifications, or (ii) qualifying entities based on the entity’s structure and assets invested or under management. The new categories would include:
- individuals with professional certifications, including those with a Series 7, 65 ,or 82 license, whether or not actively practicing in those fields;
- individuals investing in a private fund who are “knowledgeable employees” of the fund;
- adding to the list of eligible entities LLCs (LLCs are currently excluded from the definition because LLCs were less common when the rule was adopted), registered investment advisers (RIAs), rural business investment companies (RBICs);
- “catch all” entities with greater than $5 million in investments that are not formed for the specific purpose of acquiring the securities being offered, including Indian tribes and entities not already included in the list (such as future, yet-to-be conceived entity forms);
- “family offices” and their “family clients,” (as those terms are defined in the Investment Advisers Act) with at least $ 5 million in assets under management; and
- “spousal equivalents,” or cohabitants occupying a relationship generally equivalent to that of a spouse, qualifying together.
The proposed amendments would add corresponding amendments to other SEC rules including changes to the qualified institutional buyer definition in Rule 144A to include:
- LLCs and RBICs that meet the existing qualified institutional buyer $100 million in securities owned threshold;
- “catch-all” entities, or entities not already included in the list (such as future, yet-to-be conceived entity forms), where the entities satisfy the existing $100 million threshold and are not formed for the specific purpose of acquiring the securities being offered.
In the SEC’s press release, SEC Commissioner Jay Clayton commented that “Modernization of [the] approach is long overdue;” and the proposals “add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.” The proposals will be subject to a 60-day public comment period after their publication in the Federal Register.