On December 18, 2019, the Securities and Exchange Commission, on a 3 to 2 vote, proposed amendments to the definition of “accredited investor” in order to update that definition and expand the investors that would qualify as accredited investors able to participate in private offerings.[1]  The definition of “accredited investor” is important principally for determining who can invest in private offerings under Rule 506(b) without limitation as to number and without any information required as a condition of the exemption and as to who is eligible to invest in an offering with general solicitation under Rule 506(c).

As proposed, while maintaining the existing financial tests for individuals without any inflation adjustment, the amendments would add a new category based on professional credentials approved by the SEC, which initially would be persons who hold broker or investment adviser licenses.  The amendments also would add new categories of entities, including in particular any entity owning more than $5 million in investments, which was not formed for purposes of the investment.  Other categories would include (i) “knowledgeable employees” of private funds for purposes of investment in that fund and (ii) “family offices” with at least $5 million in assets under management and their “family clients.”  In a significant update, the term “spousal equivalent” would be added to broaden the ability of individuals to aggregate for purposes of meeting the financial tests based on income and assets.

Corresponding changes would be made in other rules using the concept of accredited investors, including Rule 144A which includes certain large institutional accredited investors as qualified institutional buyers.

In comments at the meeting, Chairman Clayton indicated that the staff is considering further changes to allow investments through pooled vehicles, although he expressed his personal concern that this be permitted only if the interests of the sponsors and advisers and those of the investors were properly aligned.

The proposal is subject to public comment for a 60-day period.

[1] Proposed Rule Amendments to the Accredited Investor Definition, available here:  https://www.sec.gov/rules/proposed/2019/33-10734.pdf