Proposed SEC Updates to Definition of “Accredited Investor”
Who qualifies as an accredited investor for purposes of participating in private capital markets? According to a recent press release from the U.S. Securities and Exchange Commission (SEC), the SEC has proposed amendments to its current definition of an accredited investor. As you may know, the definition of an accredited investor is “one of the principle tests for who is eligible to participate in our private capital markets,” according to the SEC. What would an amendment to the definition of an accredited investor mean in practice? In short, more people would be able to qualify as an accredited investor and to participate in private capital markets. Given that private capital markets continue to expand, a shift in the SEC’s definition could result in further expansion. Our Florida securities lawyers will tell you a bit more about the SEC proposed changes.
What is an Accredited Investor?
As we mentioned above, a person must meet the definition of an accredited investor in order to participate in private capital markets. Under current SEC rules, an accredited investor is defined as any person who falls into one of several categories, including but not limited to a bank, a broker, an insurance company, a private business development company, a 501(c)(3) corporation, or a director, executive officer, or general partner of the issuer of the securities. In addition—and this is one of the key definitions that would change under the proposal—a “natural person” may qualify as an accredited investor if that natural person has an “individual net worth, or joint net worth with that person’s spouse, [that] exceeds $1,000,000.” An individual can also qualify as an accredited investor by meeting certain annual income criteria.
The SEC proposal aims to broaden the category of the “natural person” who can be eligible to participate in private offerings, and it would also expand the definition of a “qualified institutional buyer.”
Why the SEC is Proposing an Update to Its Accredited Investor Definition
As the press release explains, the SEC sought public comment in June 2019 on “possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.” The concept release in which the SEC solicited public comment arose out of an SEC staff report from 2015 that investigated the history of the definition of an accredited investor and considered ways to update that definition.
How the Definition of an Accredited Investor Would Change
How, precisely, would the proposed amendments change the definition of an accredited investor? The following is a short list provided in the SEC press release:
- A natural person could qualify as an accredited investor based on “professional knowledge, experience, or certifications”;
- Certifications that could allow a natural person to qualify could include but would not be limited to a Series 7 license, Series 65 license, or Series 82 license;
- Knowledge that could allow a natural person to qualify could include but would not be limited to a person identified as a “knowledgeable employee” of a private fund;
- Certain limited liability companies (LLC) could qualify as accredited investors;
- Entities owning “investments” under the Investment Company Act in excess of $5 million, including Indian tribes, could qualify;
- “Family offices” that have at least $5 million in assets could qualify; and
- A natural person could qualify with the existing $1 million requirement with a “spousal equivalent” (and not just a spouse, as the current definition requires).
Contact a Florida Securities Lawyer
If you have questions about the SEC proposed amendments, you should speak with a Florida securities attorney at our firm. Contact the Law Office of Clifford J. Hunt, P.A. today.
Resources:
ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y3.0.1.1.12.0.46.176
sec.gov/news/press-release/2019-265
