The Securities and Exchange Commission Wednesday amended its “accredited investor” definition to allow investors to qualify based on defined measures of professional knowledge, experience or certifications — including holding certain Financial Industry Regulatory Authority licenses — in addition to the existing tests for income or net worth.
The 166-page amendments adopted Wednesday also expand the list of entities that may qualify, including by allowing any entity that meets an “investments test.”
“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” said SEC Chairman Jay Clayton, in a statement. “I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”
The commission stated that the amendments to the final rule are part of its “ongoing effort to simplify, harmonize, and improve the exempt offering framework, thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.”
SEC Commissioner Hester Peirce tweeted Wednesday: “Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them ‘no, unless you’re rich.’”
In the case of individuals, “the previous rule used wealth — in the form of a certain level of income or net worth — as a proxy for financial sophistication,” the SEC states. However, “we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”
The two Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, voted against the changes. In a joint statement, they said “today’s amendments purport to ‘update’” the accredited investor definition “while leaving in place 38-year old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors—the bulk of whom are seniors—going forward.”
The thresholds stand at a net worth of at least $1 million excluding the value of primary residence, or income at least $200,000 each year for the last two years (or $300,000 combined income if married).
According to the SEC, the amendments to the accredited investor definition in Rule 501(a):
- add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials, including the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. (The Commission will reevaluate or add certifications, designations or credentials in the future);
- include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
- clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs);
- add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries;
- 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.
Barbara Roper, director of investor protection for the Consumer Federation of America, told ThinkAdvisor Wednesday the “specific categories” added by the Commission “do not pose a particular concern. It is reasonable to include sophistication as a measure of accredited investor status.”
However, Roper added, the Commission “continues to refuse to grapple with the fact that the vast majority of individuals who currently qualify as accredited investors lack the wealth, financial sophistication, or access to information necessary to ‘fend for themselves’ without the protections afforded in the public markets.”
The SEC, Roper argued, “continues to allow private issuers to sell securities without providing the essential facts needed to evaluate those securities to individuals who cannot separately negotiate access to that information, do not have the financial sophistication to evaluate it if they did gain access to that information, and do not have the wealth to withstand potential losses or weather the liquidity risks posed by private investments.”
The amendments also expand the definition of “qualified institutional buyer” in Rule 144A to include LLCs and RIBC programs if they meet the $100 million in securities owned and invested threshold in the definition.
The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” the SEC said, provided they satisfy the $100 million threshold.
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