On Dec. 18, 2019, the Securities and Exchange Commission (SEC or Commission) proposed amendments to broaden the definition of “Accredited Investor” under Regulation D to cover a broader group of investors, including adding new categories of retail investors based on professional knowledge, experience or certifications and new categories for certain entities.
In particular, the proposed rules would allow individuals 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 — without meeting certain income or net worth requirements. Professional certifications and designations or other credentials that would qualify are proposed to be determined by Commission order after a notice and comment period. For investments in private funds, retail investors could also qualify as accredited investors if they are “knowledgeable employees” of the fund. As currently proposed, existing net worth and income thresholds would not be altered.
The proposed amendments also expand the definition to include several new entity categories, including any entity owning in excess of $5 million in investments that was not formed for the specific purpose of investing in the securities offered, certain limited liability companies, registered investment advisers, rural business investment companies, and family offices with $5 million under investment and their “family clients,” among others.
The proposed amendments come in the wake of an SEC concept release requesting comments on the matter in June 2019. The SEC continues to request comments regarding the current financial thresholds used in the definition of Accredited Investor and whether to index the thresholds to inflation in the future.
If the SEC adopts the proposed rules liberalizing the Accredited Investor definition to cover more retail or retail-like investors, private fund managers should consider developing private or registered products (hedge or private equity) that are offered to a broader group of investors. However, this proposal does not change the definition of “qualified purchaser,” which remains, pending a more holistic review of investment standards.
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Comments on the proposals are due 60 days following publication of the proposing release in the Federal Register.
Additional information on the proposing release can be found here