The US Securities and Exchange Commission is amending the meaning of the term “accredited investor,” one of the principal tests for determining who is eligible to participate in US private capital markets.
At the moment, HNW investors who do not meet specific income or net-worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in private markets. The SEC wants to "identify institutional and individual investors that have the knowledge and expertise to participate in those markets" more effectively than it does today.
Chairman Jay Clayton said of the amendments, which have yet to come into force: “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities...that may qualify to participate in certain private offerings.”
The amendments will allow investors to qualify as accredited investors according to defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. They will also broaden the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify and change the regulatory definition of “qualified institutional buyer” in Rule 144A in accordance with the Securities Act 1933, although the details of this need not concern us here.
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
- add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the SEC may designate from time to time by order. In conjunction with the adoption of the amendments, the SEC designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach makes it easier for the regulator to re-evaluate or add certifications, designations or credentials in the future. The SEC is asking for the industry's views about additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
- include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
- add a new category for any entity, including funds, that own “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 definition of “accredited investor” definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendment to Rule 215 will replace the existing definition with a cross reference to the definition in Rule 501(a).
The amendments become effective 60 days after their publication in the Federal Register.