In a 3 to 2 vote, the SEC approved a proposal amending the definitions of "accredited investor" in Rule 501(a) of Regulation D and "qualified institutional buyer" under Rule 144A to increase accessibility to private capital markets.
According to the SEC, the "accredited investor" definition would be amended to:
- add new categories allowing 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;
- add a new category for investments in a private fund based on the person's status as a "knowledgeable employee" of the fund;
- expand the current list of entities that may qualify as accredited investors to include certain limited liability companies, registered investment advisers and rural business investment companies ("RBICs");
- introduce a new category for any entity, including a tribal government, owning investments in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- 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 by allowing spousal equivalents to pool their finances for the purpose of qualifying as accredited investors.
Additionally, the "qualified institutional buyer" definition would be modified to:
- expand the types of entities eligible for qualified institutional buyer status to include certain limited liability companies and RBICs if they meet the $100 million in securities owned and investment threshold in the definition; and
- add a "catch-all" category permitting certain institutional accredited investors to be qualified institutional buyers after satisfying the $100 million threshold.
The SEC Commissioners provided concurring and dissenting speeches, respectively, on the proposal (see here, here, here and here).
Comments on the proposal must be submitted within 60 days after publication in the Federal Register.
Commentary
The proposed amendments to the "accredited investor" definition are consistent with the agenda of the SEC under Chair Jay Clayton to promote capital formation and expand investment opportunities in the U.S. financial markets. The proposed amendments, which impact Reg. D issuers (i.e., private funds) and their investors, only add new categories to the accredited investor definition and do not amend any current categories. Interestingly, the SEC did not raise any of the financial thresholds in the current definition (i.e., for natural persons, $1 million net worth or $200,000 income for individuals / $300,000 income for couples, or for entities, $5 million in assets), in effect generally in form since 1982. In the proposing release, the SEC states that any financial threshold changes would be disruptive to the Reg. D markets (but has requested comment on this decision).
Commentary
A common issue underlies both this debate over the expansion of the definition of "accredited investor" and the debate over the expansion of broker-dealer fiduciary obligations to their customers.
That issue concerns the competence of individuals to make investment decisions. One side argues that individual investors are stupid and can't be trusted to evaluate information. (There is no shortage of evidence that individuals are ill-informed about the markets, economics, politics, the Constitution, science, and so on.) The other side contends that there should be some level of wealth, or expertise, or experience, above which individuals could be trusted to make financial decisions for themselves.
As a general matter, if individuals are not competent to be allowed to make investment decisions, what does it say about their competence in, for example, voting or child raising, or any number of other important decisions? If the results indicate a broad lack of competence in a range of areas, what then?
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