The ability to gain access to the private capital markets has historically been a game of tug-of-war between sophistication and wealth. On August 26, the Securities and Exchange Commission (SEC) made clear that’s no longer the case. Chairman Jay Clayton announced that, “for the first time, individuals will be permitted to participate in [the] private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”
As part of an initiative to expand investment opportunities while simultaneously maintaining investor protections, the SEC adopted amendments to the definition of “accredited investor.” The concept of an accredited investor is central to participating in various securities offerings that are exempt from registration under the federal securities laws. The new amendments revise Rule 215, Rule 501(a), and Rule 144A under the Securities Act of 1933 and conforming amendments to the relevant rules under the Securities Exchange Act of 1934.
Of most interest to the investing public, Rule 501(a) provides the definition of accredited investor as it pertains to Regulation D. Regulation D lists various mechanisms by which securities can be offered without registration with the SEC, provided certain requirements are satisfied. Rule 144A provides a safe harbor to allow for otherwise impermissible resales of securities to large qualified institutional buyers (QIBs) as defined in the rule. The amendments expand the pool of potential purchases under this safe harbor.
The new definition adds a new category that allows an individual to qualify as an accredited investor based on certain professional certifications, designations, or other credentials issued by an accredited educational institution. The SEC will determine which educational institutions are accredited for this purpose. Regarding investments in a private fund, knowledgeable employees will now qualify as accredited investors. Additionally, the expansion includes limited liability companies with $5 million in assets, SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies.
The amendments also add a new category of accredited investor for any entity, including Native American tribes, governmental bodies, funds, and foreign entities that own investments in excess of $5 million as long as the entity wasn’t formed for the specific purpose of investing in the securities offered. Finally, family offices with at least $5 million in assets under management and their family clients as well as the term “spousal equivalent” were added to the list of qualifying accredited investors.
The definition of QIB in Rule 144A was expanded to include limited liability companies and rural business investment companies if they meet a threshold of $100 million in securities owned and invested. Furthermore, any institutional investors included in the definition of accredited investor that aren’t otherwise explicitly listed in the definition of qualified institutional buyer are also added to the list if they satisfy the $100 million threshold.
These investor-centric amendments provide an opportunity for an increased number of participants in the private capital markets, as investors will no longer be defined solely by their wealth. These changes will become effective 60 days after they’re published in the Federal Register.
If you have any questions regarding the content of this alert, please contact Chris Bonner, special counsel, at cbonner@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Corporate Practice Area.