SEC permits more investors into private capital pool

For the first time, individuals with defined measures of professional knowledge, will be allowed to participate in private capital markets without having to meet the traditionally required income or net worth levels. The U.S. Securities and Exchange Commission (SEC) has broadened the definition for who the commission views as an ‘accredited investor’ and a ‘qualified institutional buyer’. The amendments to the definition also expand and update the list of entities that may qualify to participate in certain private offerings to include tribal governments and other organizations.

With these amendments to the accredited investor definition, the SEC aims to expand investment opportunities in private markets. Prior to these changes, any individual, regardless of professional knowledge, was required to maintain a net worth of $1 million or an annual income of $200,000 ($300,000 if combining with a spouse), to be considered an accredited investor. With the expanded definition, outlined in detail below, the SEC believes that it can maintain investor protections while opening the door to broader participation within the private capital markets.

The definition of accredited investor is expanded to now include:

• Persons with certain professional certifications, including licensed financial professionals holding Financial Industry Regulation Authority Series 7, 65, or 82 licenses. The commission also notes that it is open to reviewing other professional certifications, designations, and credentials for consideration in the future;
• In terms of investments in private funds, persons deemed “knowledgeable employees” of the fund;
• Family offices with a minimum of $5 million in assets under management, and their “family clients” (terms as defined under the Investment Advisers Act);
• Rural Business Investment Companies (RBICs), SEC and state registered investment advisers, and limited liability companies with $5 million in assets;
• Any entity, including Indian tribes, funds, and government bodies, that own investments over $5 million and that was not formed with the specific purpose of investing in the offered securities; and,
• Spousal equivalents may pool their finances for the purpose of qualifying as accredited investors under the term.

The SEC’s expansion of the definition for a qualified institutional buyer will now extend to rural business investment companies and limited liability companies that meet the “$100 million in securities owned and invested threshold”. The commission has also allowed for this definition to potentially extend beyond LLCs and RBICs, noting that the new definition may include “any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of ‘qualified institutional buyer,’” provided they satisfy the $100 million threshold.

These amendments, initially adopted Aug. 26, will become effective 60 days after publication within the Federal Register. The final rule is available here.