At an open meeting on December 18, 2019, the U.S. Securities and Exchange Commission (SEC) voted to propose amendments to the definition of "accredited investor," one of the key thresholds for eligibility to participate in most private offerings. SEC Chairman Jay Clayton stated that these "proposals are an important step in [the SEC's] ongoing efforts to assess the private offering framework as a whole, including ways to increase opportunity for more of our Main Street investors to participate in the private capital markets." As a reminder, earlier this year, the SEC requested comments relating to the accredited investor definition as part of its Concept Release on Harmonization of Securities Offering Exemptions.
The proposed amendments would expand the categories of natural persons and entities that may qualify as accredited investors. The following table provides a side-by-side comparison of the categories of accredited investors under existing Rule 501 of Regulation D and the proposed amendments to these categories.
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Entities |
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In addition, the SEC proposed 1) to amend Rule 163B to extend testing the waters communications to potential investors that are, or that an issuer or person authorized to act on its behalf, reasonably believes are institutions that are accredited investors under proposed Rules 501(a)(9) and (a)(12) and 2) to amend the definition of "qualified institutional buyer" in Rule 144A to include limited liability companies, RBICs, and any institutional accredited investor not already listed in Rule 144A that satisfies the $100 million threshold.
What to Do Now?
The SEC is accepting public comments on the proposed amendments within 60 days of their publication in the Federal Register. Comments can be submitted here.
For more information on the SEC's proposed amendments or any related matter, please contact any member of the emerging companies practice at Wilson Sonsini Goodrich & Rosati.
1 “Knowledgeable employee” is defined in Rule 3c-5(a)(4) of the Investment Company Act of 1940, and the proposed amendments state that this category “would include, among other persons, trustees and advisory board members, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund’s investments, as well as employees of the private fund or the affiliated person of the fund (other than employees performing solely clerical, secretarial, or administrative functions) who, in connection with the employees’ regular functions or duties, have participated in the investment activities of such private fund for at least 12 months.”
2 These categories are limited in Rule 501 as follows: Any bank as defined in section 3(a)(2) of the Securities Act of 1933 (Act), or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors.