The U.S. Securities and Exchange Commission (“SEC”) estimates that capital raised in 2019 in private offerings under Regulation D ($1.56 trillion) was larger than the $1.2 trillion raised in public offerings during the same period. In a recent move, the SEC provided further support of private capital markets by broadening the definition of who may qualify as an “accredited investor” under Regulation D. While the stated purpose of the revised definition is to “better align access to unregistered offerings with the financial sophistication required to assess an investment opportunity,” we expect the result will be an increase in private capital entering the marketplace in 2020 and beyond.
Specifically, the newly added categories of accredited investors
include:
• Individuals who hold certain professional certifications,
designations, or credentials irrespective of their wealth may now
qualify. For example, holders of Series 7, Series 65, and Series 82
licenses in good standing should be qualified under the expanded
framework.
• Individuals making an investment in a private funds who are
“knowledgeable employees” as defined under federal
securities laws.
• Individuals who satisfy a “spousal equivalent”
test for purposes of pooling their finances (i.e., cohabitants
occupying a relationship generally equivalent to that of a
spouse).
• Limited liability companies and certain family offices with
at least $5 million in assets under management.
These rule changes permit an even greater number of individuals and entities with reliable indicators of financial sophistication to participate in private markets. Equally as important, the amendments allow private companies with access to a greater number of potential investors.
Investors, companies and other private market participates interested in capital market transactions should consult with legal counsel experienced in private offerings to ensure compliance with applicable federal and state securities laws.
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