December 23, 2019 | In an effort to enable greater access to the private capital markets, the Securities and Exchange Commission (SEC) has proposed amendments to expand the definition of “accredited investor” under current rules and that of “qualified institutional buyer” in Rule 144A under the Securities Act of 1933.

The amendments, which were proposed last week, a) add new categories of natural persons based on professional knowledge, experience, or certifications to the definition; and b) create new categories of entities, including a “catch-all” for any entity owning in excess of $5 million in investments. Corresponding changes are also proposed to the qualified institutional buyer definition for institutions that qualify for accredited investor status when they meet the existing threshold under Rule 144A of $100 million in securities owned and invested.

We believe this represents a long overdue modernization of the definitions and, if adopted, will make it easier for both individual investors and private entities such as family offices to tap into the private capital markets.

Specifically, the amendments would:

  • 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;
  • 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; 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.

As always, the proposed rules are subject to a 60-day comment period, after which we believe it is likely the amendments will be adopted in near-current form. In the meantime, feel free to contact the firm with any questions, and we will keep you appraised of developments.

For more information, please contact Geoff Morgan or Jessica Fairchild.

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