In December 2019, the SEC voted to propose amendments to the definition of accredited investor, one of the principal tests for who is eligible to participate in our private capital markets. The proposed amendments would add new categories of natural persons and expand the list of entities that may qualify as accredited investors based on their professional knowledge, experience, or certifications. The proposal also would expand the category of entities that qualify as accredited investors by, among other things, allowing any entity that meets an investments test to qualify.
You might be asking yourself “How is he going to link this SEC proposal back to this Blog’s recent focus on [obsession with?] the new proposed regulations under Code Section 162(m)?” As we have discussed before (and readers know), Section 12(g) of the 1934 Act provides exemptions from the requirement to register a class of equity securities for companies (a) with assets not exceeding $10 million; or (b) if the class of equity securities is held of record by fewer than 2,000 persons and fewer than 500 of those persons were not accredited investors, or is held of record by fewer than 2,000 persons in certain cases. If these companies are not required to register a class of securities, they may not become subject to 162(m).
Of course, the fact that a company is not subject to 162(m) probably is not the most important aspect of an exemption from registration. Companies (unicorns and others) will be able to remain privately held for a longer period of time if they so desire (and plan).
The proposed amendments would modify the definition of accredited investor in § 230.501(a) under the Securities Act of 1933, “Definitions and terms used in Regulation D,” as follows:
- Amends §§ 230.501(a)(1) and (3) to provide that limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) may qualify as accredited investors;
- Amends §§ 230.501(a)(5) and (6) to provide that spousal equivalents may pool their finances for the purpose of qualifying as an accredited investor and adds a new § 230.501(j) to define “spousal equivalent;”
- Adds new §§ 230.501(a)(9) and (10) to provide that natural persons also may 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;
- Adds a new § 230.501(a)(11) to provide that 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; and
- Adds a new § 230.501(a)(12) to provide that “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.
Commissioners Jackson and Lee voted against the proposed amendments arguing that the expansion of the accredited investor definition would weaken the investor protection concerns present in private markets.
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