On December 18, the Securities and Exchange Commission voted to propose amendments (the Proposal) to the definition of “accredited investor” for purposes of private placements under Regulation D and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act of 1933. The Proposal is intended to update and improve the definitions of those terms in order to more effectively identify both institutional and individual investors with the sophistication to participate in private capital markets transactions. In the SEC’s press release announcing the Proposal, SEC Chairman Jay Clayton noted that, “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only [on] a person’s income or net worth. Modernization of this approach is long overdue.” As highlighted in the fact sheet included in the press release, the Proposal would, among other things:
- add new categories of qualifying natural persons to the definition of accredited investor, including (A) individuals with certain professional certifications and designations (such as Series 7, 65 or 82 licensure or other credentials issued by accredited educational institutions); or (B) individuals who are “knowledgeable employees” (as defined under the Investment Company Act of 1940 (the Investment Company Act)) of a hedge fund, venture capital fund or private equity fund for purposes of investing in that fund;
- add new categories of qualifying entities to the definition of accredited investor, including limited liability companies that meet certain conditions (consistent with existing SEC staff guidance), registered investment advisers and rural business investment companies (RBICs); “family offices” with at least $5 million in assets under management and their “family clients” (as such terms are defined in the Investment Advisers Act of 1940); and, as a so-called “catch-all” category, entities (including Indian tribes) owning in excess of $5 million in “investments” (as such term is defined under the Investment Company Act);
- permit “spousal equivalents” (in addition to spouses) to pool their finances for purposes of qualifying as accredited investors (as it has not been clear that persons in legally recognized unions, such as domestic partnerships, civil unions and same-sex marriages, would currently be considered spouses for purposes of the accredited investor definition);
- expressly include limited liability companies and RBICs as entities that are eligible to be considered “qualified institutional buyers” as defined in Rule 144A so long as they meet the $100 million in securities owned and investment threshold in the definition; and
- permit an institutional accredited investor under Rule 501(a) of Regulation D, of an entity type not already included in the qualified institutional buyer definition, to so qualify if it satisfies the $100 million threshold.
The Proposal would not adjust the current net-income or net-worth standards or impose any limit on the amount that a person may invest under those standards.
The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.
The Proposal is available here, and the press release and fact sheet are available here.