The Securities and Exchange Commission proposed amendments on Wednesday to expand the definition of accredited investor, one of the principal tests for who is eligible to participate in private capital markets.
Currently, all accredited investors must have an individual income of $200,000, a joint income of $300,000, or a net worth that exceeds $1 million – not including a primary residence.
The proposed amendments would allow more investors to participate in private offerings by adding new categories based on professional knowledge, experience, or certifications. The proposal would also add new categories of entities, including a “catch-all” category for any entity owning more than $5 million in investments.
“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 chairman Jay Clayton. “Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.
He added, “I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
Industry groups, such as the Institute for Portfolio Alternatives and the Alternative & Direct Investment Securities Association, applauded the SEC’s efforts to expand and modernize the accredited investor definition.
“As Chairman Clayton correctly stated, we can all agree that updating the definition is long overdue…,” said Anya Coverman, IPA senior vice president of government affairs and general counsel. “We believe that the proposal will go a long way to encourage greater participation in the private markets while maintaining investor protections. We look forward to reviewing the proposal in greater detail and providing comments and suggestions to the Commission.”
John Harrison, ADISA’s executive director, said that the expanded definition “will allow more Americans with relevant expertise to invest in private offerings and increase and put more capital to work. Such private investments can deliver tremendous value to investors and provide powerful stimulus to the American economy.
Specifically, the proposed amendments would allow natural persons to qualify based on certain professional certifications and designations, such as a FINRA Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution.
In addition, with respect to investments in a private fund, a new category would be added based on the person’s status as a “knowledgeable employee.”
Limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies would be added to the current list of entities that may qualify as accredited investors, as will family offices with at least $5 million in assets under management and their “family clients,” as defined under the Investment Advisers Act.
The term “spousal equivalent” will also be added.
For qualified institutional buyers, limited liability companies and rural business investment companies will be eligible if they meet a $100 million threshold.
The public comment period will remain open for 60 days following publication in the Federal Register. To submit comments, use the SEC’s internet submission form or send an email to firstname.lastname@example.org.