How is the definition of an accredited investor being expanded?
The proposed rule will amend the definition of an “accredited investor” as follows:
With regard to individuals, the proposed rule would add the term “spousal equivalent” to the definition of a spouse, and give accredited investor status to individuals:
- that have certain professional certifications or designations or other credentials; or
- whose status as a private fund’s “knowledgeable employee.”
With regard to entities, the proposed rule would expand the list of entities, including, but not limited to:
- entities that meet an investments test; and
- family offices with at least $5,000,000 in assets under management and their family clients.
Background
Under the U.S. federal securities laws, a company that offers or sells its securities must register the securities with the Securities and Exchange Commission (“SEC”) or qualify for an exemption from registration.[1] Regulation A+ and crowdfunding provide an exemption from registration that allow the company to raise capital to with unaccredited investors, however, the process for preparing these offering documents can oftentimes be just as burdensome on the company as registering the securities. Rule 506 of Regulation D provides additional exemptions from registration; for these exemptions, we recommend only raising capital from accredited investors. If the SEC is successful in broadening the scope of who is considered to be an accredited investor, more investors will hold accredited investor status, making it easier for private companies trying to raise capital using Rule 506.
What is an accredited investor?
Rule 501 of Regulation D of the Securities Act of 1933 (the “Securities Act”) defines an accredited investor. In summary, an accredited investor is: an individual that has a net worth of $1,000,000, excluding their primary residence; or an individual that has an annual income of $200,000 or more (or $300,000 combines with their spouse) for two years and has a reasonable expectation of meeting those income requirements in the upcoming year. Additionally, Rule 501 defines specific types of entities; and directors, executive officers, or general partners of the issuing company as being accredited.
Public Policy
The SEC depicts the “accredited investor” definition as a central component of Regulation D, stating that it is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.”[2] Considering this definition, it’s clear why the SEC would like to expand the definition of an accredited investor to “identify more effectively institutional and individual investors that have the knowledge and expertise to participate in our private capital markets and therefore do not need the additional protections of the registration under the Securities Act.”[3]
Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.
[1] U.S. Securities and Exchange Commission, Accredited Investor, Fast Answers (Nov. 27, 2017), https://www.sec.gov/fast-answers/answers-accredhtm.html.
[2] U.S. Securities and Exchange Commission, Report on the Review of the Definition of “Accredited Investor”, Files (Dec. 18, 2015), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.
[3] U.S. Securities and Exchange Commission, 17CFR Parts 230 and 240, Release Nos. 33-10734; 34-87784; File No. S7-25-169, Amending the “Accredited Investor” Definition (Dec. 18, 2019), https://www.sec.gov/files/review-definition-of-accredited-investor-12-18-2015.pdf.
