The Securities and Exchange Commission proposed amendments Wednesday to its accredited investor definition, expanding the entities that qualify based on an investment test instead of an asset test.
“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,” said Chairman Jay Clayton. “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.”
Clayton said that he’s also pleased the plan “specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
Barbara Roper, director of investor protection for the Consumer Federation of America, stated on Twitter that the SEC argued that an investment test “is a better measure of sophistication than an asset test” for those qualifying to be an accredited investor.
“So why didn’t they [the SEC] consider changing the net worth requirement for individual investors to an investment test?” Roper queried.
As the agency explained, the proposed amendments — which will be out for a 60-day comment period — would add new categories of natural persons based on professional knowledge, experience or certifications.
The changes would also add new categories of entities, including a “catch-all” category for any entity owning more than $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;
- 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;
- 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;
- “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
- 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.