December 19, 2019
Securities Law Alert
Securities Law Alert
On December 18, 2019, the SEC proposed amendments to the definitions of “accredited investor” and “qualified institutional buyer” to increase access to investments in the private capital markets. This alert discusses what businesses and investors need to know.
On December 18, 2019, the Securities and Exchange Commission (“SEC” or the “Commission”) proposed amendments to the definition of “accredited investor” in the Commission’s rules and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act of 1933 to increase access to investments in the private capital markets. The proposed amendments to the accredited investor definition would add new categories of natural persons and entities to the definition, including a “catch-all” category for any entity owning in excess of $5 million in investments. Corresponding changes are also proposed to the qualified institutional buyer definition for institutions that qualify for accredited investor status when they meet the existing $100 million in securities owned and invested threshold under Rule 144A.
The accredited investor definition identifies sophisticated institutional and individual investors and is a central component of several exemptions from the registration requirements under the federal securities laws, including Rules 506(b) and 506(c) of Regulation D, which allow such sophisticated investors to participate in private capital markets. The definition also plays an important role in other federal and state securities law contexts. For example, some states use the accredited investor definition to determine whether investment advisers to certain private funds are required to be registered. FINRA rules also use the accredited investor definition to provide certain requirements and exemptions.
The proposed amendments are based on the premise that wealth – in the form of a certain level of income, net worth, or assets – should not be the sole means of establishing financial sophistication for purposes of the accredited investor definition. The amendments propose to add two new categories in the accredited investor definition for natural persons:
The amendments propose to permit natural persons to include joint income and joint net worth from spousal equivalents when determining income and net worth for purposes of qualifying as accredited investors. A “spousal equivalent” would mean a cohabitant occupying a relationship generally equivalent to that of a spouse (which the SEC previously described as including domestic partnerships, civil unions, and same-sex marriages), and assets would not need to be held jointly to be included in the calculation.
In addition, under the proposed rules, the existing income and net worth tests for individual accredited investor status, which were established in 1982, would not be updated or indexed for inflation. This is likely to substantially increase the percentage of U.S. households that would qualify as accredited investors in the future.
With respect to institutional investors, the amendments propose to add the following entity types to the current list of entities that may qualify as accredited investors:
The proposed amendments to the qualified institutional buyer definition correspond to those to the accredited investor definition. Specifically, the amendments would add RBICs and limited liability companies to the entity types that are eligible for qualified institutional buyer status if they meet the $100 million in securities owned and investment threshold in the definition. Further, the proposed amendments would also add a “catch-all” category to allow an institutional investor that is of an entity type not already included in the qualified institutional buyer definition but would qualify as an accredited investor, to qualify as qualified institutional buyers when such institutional investor satisfies the $100 million threshold.
The proposal will be open to public comment for 60 days upon its publication in the Federal Register. The full text of the proposal is available here.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.