Accredited Investor Definition Proposed Changes

Following its concept release in June 2019 soliciting public response on ways to improve upon the Securities Act exemptions related to private offerings, the SEC has voted to propose amendments to the definition of “accredited investor,” a test applied in determining eligibility of persons seeking participation in private offerings through private capital markets. According to the SEC, the goal is to improve the definition to better “identify institutional and individual investors that have the knowledge and expertise to participate…”

Adding new categories of natural persons to the definition is a featured aspect of the amendments which, among other things, will:

 “- add new categories to the definition that would permit natural persons 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;
– with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund;
– add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors;
– add a new category for any entity, including Indian tribes, 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;
– 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; and
– add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.”

The proposed amendments will now be subject to a 60-day public comment period. The rule is not without controversy — with some questioning its goals and effectiveness.  A copy of the proposed rule can be found here.