‘Accredited investor’ definition could be redefined by SEC

The U.S. Securities & Exchange Commission (SEC) is taking steps to potentially redefine the requirements of accredited investors, which would expand access to private capital markets.

Details of the proposal were announced in a Wednesday (Dec. 18) news release. Accredited investors are largely defined as people who have a high net worth or income. The SEC proposal would update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets.

In a statement explaining the proposals, SEC Chairman Jay Clayton said an update is long overdue.

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” Clayton said. “Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”

The proposed amendments, according to the release, would allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications.

The proposal would also expand the list of entities that may qualify as accredited investors by, among other things, allowing any entity that meets an investments test to qualify.

The amendment is open to public comment for 60 days after the proposal is published in the Federal Register, according to Wednesday’s release.

Jordan Carlisle, vice president of economic development and entrepreneurism at the Greater Bentonville Area Chamber of Commerce, said on Twitter the new proposal would be “huge” for people who have worked with startups in the past but haven’t been allowed to invest under current laws.

Existing laws are in place theoretically, Carlisle said, “to protect lower-income people from getting burned by con-artists.” The logic, he said, was that “sophisticated” investors had the means to assess investment risk and potential upside more so than people without money, and if they lost their money it wouldn’t hurt as bad.

“Loosening the laws will certainly burn some low net-worth people in the short-run,” Carlisle said. “In the long-run, more people will be able to invest in small private businesses, some startups and some mom and pops. This will be great for communities outside of Silicon Valley and New York.”

Carlisle also said new definitions would give incentives for people to learn how to invest and learn how to operate businesses.

The proposed amendments to the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications.  The proposed amendments would also add new categories of entities, including a “catch-all” category for any entity owning in excess of $5 million in investments.

In particular, the amendments would:

• 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;
• 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.