Author: Ashley Hatt
The SEC recently proposed a change to the term Accredited Investor earlier last month on the 18th of December and if the changes move forward, they could literally redefine how business is conducted for everyday investors. So, you may be asking yourself, what are these proposed changes, what do they mean and how will they affect investors?
To currently meet the definition of an Accredited Investor, the SEC states in rule 501 or Regulation D that an investor must meet one of the following five definitions:
(1) Any bank, or any savings and loan association or other institution as defined in section 3(a)(2) or 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000. Please note, a person’s house may not be included in consideration for their net worth.
For the individual investor, the rule normally amounts to the meeting the 5th definition which can be met by having the net worth of $1,000,000 or additionally by having an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. Meeting the definition of accredited investor can allow them access to investing in higher-risk securities that are not registered with regulatory authorities such as the SEC. These investments can come in the form of private placements, hedge funds, and alternative investments.
As the SEC Chairman Jay Clayton recently stated. “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. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
According to the SEC’s press release, the proposed changes would expand the definition of the accredited investor in the following ways:
“The proposed amendments to the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications. The proposed amendments would also add new categories of entities, including a “catch-all” category for any entity owning in excess of $5 million in investments. In particular, the proposed amendments to the accredited investor definition would:
- 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 to the qualified institutional buyer definition in Rule 144A would add limited liability companies and RBICs to the types of entities that are eligible for qualified institutional buyer status if they meet the $100 million in securities owned and investment threshold in the definition. The proposed amendments would also add a “catch-all” category that would permit institutional accredited investors under Rule 501(a), of an entity type not already included in the qualified institutional buyer definition, to qualify as qualified institutional buyers when they satisfy the $100 million threshold.”
By expanding the definition requirements for individual investors from net worth alone to include, by the SEC’s own words, “knowledge, experience, and certifications” along with the addition of the term “spousal equivalent” the SEC would be making private investments more accessible to the everyday investor.
This may all be very exciting, but the next question is where are we at in the process? What are the next steps to the proposed changes? Currently, the proposal is subject to a 60-day public comment period. If you would like to submit a comment for review to the SEC regarding your thoughts to the proposed definition change you may do so by using the SEC’s Internet submission form or by sending an email to firstname.lastname@example.org. For questions about how the proposed changes to the Accredited Investor definition may affect your firm, please contact Key Bridge Compliance, LLC at keybridgecompliance.com or by sending us an email at email@example.com.
 17 CFR § 230.501
 SEC Press Release 2019-265
 SEC Press Release 2019-265