SEC Proposes Updated Definition of Accredited Investor

On December 18, 2019, the SEC proposed rules for public comment that would broaden the definition of an “accredited investor” beyond the current definition, which is based upon income and/or net worth. The new definitions are intended to broaden participation in private capital markets by adding additional categories of persons who are considered accredited investors based upon their professional knowledge, experience, or certifications.

This proposal was preceded by, and based upon, a Commission staff report in 2015 on this issue, which was followed by a “concept release” in June 2019.

The proposal would add two new categories to the accredited investor definition for natural persons: (1) those who hold certain professional certifications or designations or other credentials or (2) those who are “knowledgeable employees” of a private fund and are investing in the private fund.

The proposal would also add additional categories of entities to the definition of a private fund in Rule 501(a). These would include Registered Investment Advisors and Rural Business Investment Companies. In addition, the proposal would add limited liability companies with total assets in excess of $5 million to the list of entities in Rule 501(a)(3). Moreover, the proposal would create a “catch-all” category that would include any entity (regardless of the specific type of entity, including entity types that may not exist as of today) that holds $5 million in investments.

The SEC’s release relating to the proposed rule can be found at https://www.sec.gov/news/press-release/2019-265, and the proposed rule itself, together with the SEC report, can be found at https://www.sec.gov/rules/proposed/2019/33-10734.pdf. Comments will be due 60 days after the Rule is published in the Federal Register.

If you have additional questions, please contact Matt Fornshell or Dan Anderson.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.