The Securities and Exchange Commission (SEC) recently proposed amendments to the definition of “accredited investor,” one of the principal tests for determining the eligibility of investors to participate in various kinds of private securities offerings. The proposal looks to expand and update the definition to create a more effective method for identifying individual and institutional investors that have the necessary knowledge and expertise to participate in private capital markets. Overall, the proposal would add categories that would expand the number of eligible investors by creating eligibility for people based on their experience, knowledge or certifications. This expansion would also apply to certain types of entities and additional persons as well.
Particularly, the proposed amendments to the accredited investor definition would:
- Expand the definition to include “family offices.” – Under the proposed changes, “family offices” would be added as a new category of accredited investors with a few caveats. First, they must have at least $5 million in assets under management. Second, they cannot be formed for the specific purpose of acquiring the securities that are being offered.
- Create a “catch-all” for entities with $5 million or more in investments. – Any entity, including Indian tribes, that own in excess of $5 million in “investments” as defined in Rule 2a51-1(b) under the Investment Company Act and that were not formed for the specific purpose of investing in the securities offered would now be considered an accredited investor.
- Add the term “spousal equivalent.” – Under the present rule, a natural person could qualify as an accredited investor by having at least $300,000 in joint income in the two most recent years or have at least $1 million in joint net worth. The proposed amendment would expand both the income and net worth criteria to include “spousal equivalents” (For example, cohabitants that are in a relationship that is equivalent to them being considered spouses).
- Add a new category based on a person’s status as a “knowledge employee” of a private fund. – Concerning an investment in a private fund, the proposal adds a new category of accredited investor for persons who qualify as “knowledgeable employees” of the fund as defined under the Investment Company Act of 1940.
- Add new categories for certain professional designations and certifications. – The added categories would allow for persons holding certain professional certifications such as a Series 7, 65 or 82 or other credential(s) issued by an accredited educational institution to qualify as an accredited investor.
- Add certain limited liability companies (LLCs) along with registered investment advisers and Rural Business Investment Companies (RBICs). – The SEC’s proposal would expand the type of entities that qualify as accredited by including companies that are registered with the SEC as an investment adviser or rural business investment companies. The notion of adding LLC’s is to merely codify the SEC’s already-existing position of allowing companies that have total assets in excess of $5 million to qualify as an accredited investor so long as they have not been formed for the purpose of making the investment. Additionally, the proposal would also ensure that entities that are considered accredited investors would also qualify for qualified institutional buyer status if they meet the $100 million in securities owned and invested under Rule 144(a)(1)(i).