The Securities and Exchange Commission (“SEC”) amended the accredited investor definition, allowing more investors to qualify to participate in private offerings. Formerly, to qualify as an “Accredited Investor,” an individual had to have a net worth greater than $1 million, annual income exceeding $200,000 for the past two years or $300,000 combined income (if married.) The new changes expanded the definition to include financial sophistication as another measure to qualify as an accredited investor. The SEC chairman Jay Clayton also stated that “the SEC is expanding and updating the list of entities, including organizations that may qualify to participate in certain private offerings.”
The new amendments to the accredited investor definition in Rule 501(a) are as follows:
- Permits natural persons to qualify as accredited investor by having a Series 7, Series 65 or Series 82 licenses;
- Natural persons who are “knowledgeable employees of the fund;”
- Clarified that Limited Liability Companies (“LLC”) with $5 million in assets may be accredited investors and added SEC and state-registered investment advisers, exempt reporting advisors and rural business investment companies (“RBIC”);
- Add a new category for any entity, including Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries;
- 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 SEC reiterated that the goal of the amendment is to expand investment opportunity while maintaining appropriate investor protections. However, two commissioners voted against the changes and were quoted saying, “today’s amendments purport to ‘update’” the accredited investor definition “while leaving in place 38-year old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors—the bulk of whom are seniors—going forward.”
Barbara Roper, director of investor protection for the Consumer Federation of America, stated that the amendment does not pose a concern and is reasonable to include financial sophistication as a measure of an accredited investor’s status. However, Ms. Roper expressed concern that those that currently qualify as an accredited investor lack the wealth and knowledge to participate in private offerings without the protections afforded in the public markets. Roper emphasized that many accredited investors do not have the financial sophistication or wealth to withstand potential losses and liquidity risks associated with private investments.
The amendments also expand the Rule 144A definition of a “qualified institutional buyer” to include LLCs and RBIC programs, if they meet the $100 million in securities owned and invested requirement. The amendment also added to the list any institutional investor included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.