On December 18, 2019, the SEC proposed amendments to the definitions of both “accredited investor” (under Regulation D) and “qualified institutional buyer” (“QIB”) (Rule 144A) under the Securities Act of 1933.

In announcing the proposed amendments, SEC Chairman Jay Clayton noted that, “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only [on] a person’s income or net worth. Modernization of this approach is long overdue.”  The proposed revisions reflected a mindfulness by the SEC that “an overly broad definition could potentially undermine important investor protections and reduce public confidence in this vital market, [and that] an unnecessarily narrow definition could limit investor access to investment opportunities where there may be adequate investor protection given factors such as that investor’s financial sophistication, net worth, knowledge and available to investors in registered securities offerings.”  The current net-income and net-worth standards would remain unchanged and, unlike Regulation A^[1] offerings, there were no proposed limits on the amount that a person could invest in either Regulation D or Rule 144A offerings.

The SEC’s fact sheet highlighted the following aspects of the proposed amendments:

• New categories of qualifying natural persons added to the definition of accredited investor, including:
  • individuals with certain professional certifications and designations (such as Series 7, 65 or 82 licensure or other credentials issued by accredited educational institutions); or
  • individuals who are “knowledgeable employees” (as defined under the Investment Company Act of 1940 (the ‘40 Act)) of a hedge fund, venture capital fund or private equity fund for purposes of investing in that fund.
• New categories of qualifying entities added to the definition of accredited investor, including:
  • limited liability companies that meet certain conditions (consistent with existing SEC staff guidance);
  • registered investment advisers and rural business investment companies (RBICs);
  • “family offices” with at least $5 million in assets under management and their “family clients” (as such terms are defined under the Investment Advisers Act of 1940); and,
  • as a so-called “catch-all” category, entities (including Indian tribes) owning in excess of $5 million in “investments” (as such term is defined under the ’40 Act).
• “Spousal equivalents” (in addition to spouses) allowed to pool their finances for purposes of qualifying as accredited investors (to clarify that persons in legally recognized unions, such as domestic partnerships, civil unions and same-sex marriages, would be considered spouses for purposes of the accredited investor definition)
• Limited liability companies and RBICs expressly included as entities that may be considered QIBs under Rule 144A so long as they meet the $100 million in securities owned and investment threshold in the QIB definition.
• Institutional accredited investors under Rule 501(a) of Regulation D that are entity types not already included in the QIB definition, may so qualify if they satisfy the $100 million threshold in the QIB definition.

The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.

The proposing release is available here, and the SEC’s press release and fact sheet are available here.

[1] An exemption from registration that allows offerings up to $50 million but that, under certain circumstances, limits the amount that that an individual unaccredited investor can invest to no more than 10% of the greater of the person’s, alone or together with a spouse, annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).