Regulator steps further toward new accredited-investor definition

Proposed amendments would see long-overdue enhancements to binary approach in categorizing individuals

Regulator steps further toward new accredited-investor definition

The movement to expand individual investors’ access to private capital markets in the US could get an extra push as the country’s regulatory watchdog proposes to amend its criteria to qualify a person as an accredited investor.

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” said US Securities and Exchange Commission Jay Clayton. “Modernization of this approach is long overdue.”

As reported by ThinkAdvisor, the SEC’s proposed amendments, which were released Wednesday, seek to go beyond the traditional approach that relies on an asset test and move further toward an investment test. In particular, Clayton said, they would add more means to determine individuals’ eligibility to participate in the private capital markets “based on established, clear measures of financial sophistication.”

Under the proposed changes, new categories of natural persons will be added based on their professional knowledge, experience, or certifications. New categories of entities would also be added, including one “catch-all” category for any entity that holds more than US$5 million in investments.

Specifically, the additions sought under the amendments include:

  • New categories that would qualify natural persons as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
  • In the case of investments in a private fund, a new category based on a person’s status as a “knowledgeable employee” of the fund;
  • Limited liability companies that meet certain conditions, as well as registered investment advisors and rural business investment companies (RBICs), as new candidates to include in the current list of entities that may qualify as accredited investors;
  • “Family offices” with at least US$5 million in AUM and their “family clients,” as defined under the Investment Advisors Act; and
  • The use of the term “spousal equivalent” within the accredited investor definition, allowing spousal equivalents to pool their finances for the purpose of qualifying as accredited investors.

Another new proposed category seeks to add any entity, including Indian tribes, that owns “investments” — as defined in Rule 2a51-1(b) under the Investment Company Act — in excess of US$5 million and that was not formed for the specific purpose of investing in the securities offered.

Clayton expressed approval for that aspect of the proposal in particular, which “specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”

The proposed amendments will be out for a 60-day comment period.


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