PublicationOn December 18, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments that would expand the definitions of “accredited investor” and “institutional buyer” in Rule 144A, including by adding new categories of individuals and entities that would qualify. These definitions determine under many SEC rules which individuals and entities may participate and invest in in private placement offerings, including under Rule 506(b) and 506(c) of Regulation D.
Significantly, the proposed amendments do not change the basic definitions for investors, which for individuals require income of $200,000 in the past two years (or joint income of $300,000) or a net worth of greater than $1 million, excluding a primary residence.
Rather, the proposed amendments to the accredited investor definition would add new categories of (i) qualifying individuals based on financial sophistication as measured by professional knowledge, experience, certifications, or (ii) qualifying entities based on the entity’s structure and assets invested or under management. The new categories would include:
- individuals with professional certifications, including those with a Series 7, 65 ,or 82 license, whether or not actively practicing in those fields;
- individuals investing in a private fund who are “knowledgeable employees” of the fund;
- adding to the list of eligible entities LLCs (LLCs are currently excluded from the definition because LLCs were less common when the rule was adopted), registered investment advisers (RIAs), rural business investment companies (RBICs);
- “catch all” entities with greater than $5 million in investments that are not formed for the specific purpose of acquiring the securities being offered, including Indian tribes and entities not already included in the list (such as future, yet-to-be conceived entity forms);
- “family offices” and their “family clients,” (as those terms are defined in the Investment Advisers Act) with at least $ 5 million in assets under management; and
- “spousal equivalents,” or cohabitants occupying a relationship generally equivalent to that of a spouse, qualifying together.
The proposed amendments would add corresponding amendments to other SEC rules including changes to the qualified institutional buyer definition in Rule 144A to include:
- LLCs and RBICs that meet the existing qualified institutional buyer $100 million in securities owned threshold;
- “catch-all” entities, or entities not already included in the list (such as future, yet-to-be conceived entity forms), where the entities satisfy the existing $100 million threshold and are not formed for the specific purpose of acquiring the securities being offered.
In the SEC’s press release, SEC Commissioner Jay Clayton commented that “Modernization of [the] approach is long overdue;” and the proposals “add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.” The proposals will be subject to a 60-day public comment period after their publication in the Federal Register.
Contact the securities and capital markets professionals at Michael Best for more information about how the proposals could affect your ability to accept investors or invest in private offerings, or if you want to prepare a comment to the proposed rules.
Contact the Venture Best® Team at Michael Best for more information about how the proposed rules could impact your next fundraising round. Related People Preview Attorney's BiographyJosh advises clients in all realms of corporate law, including federal and state securities law compliance, the formation and financing of start-up businesses, and mergers and acquisitions.  Preview Attorney's BiographyClients across multiple industries turn to Michael to coordinate their more complex business transactions. They value his quick assessment of issues and their implications, as well as his creative yet effective solutions to the many issues that arise during the course of a transaction.Michael’s practice focuses on mergers and acquisitions, buyout transactions, securities regulation, and venture capital investment transactions.  Preview Attorney's BiographyGreg is a distinguished partner in the firm’s Corporate practice group who has more than 25 years of experience in Mergers and Acquisitions and Corporate Financing transactions.  Preview Attorney's BiographyClients from a variety of industries turn to Kevin for guidance and counsel on a broad range of matters pertaining to securities. He has extensive experience in public and private securities offerings, broker-dealer compliance (particularly regarding resales of restricted securities), and regulatory enforcement defense with the U.S. Securities Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and state securities regulators.  Preview Attorney's BiographyMelissa works closely with entrepreneurs and has a strong track record helping to organize, finance, and build early-stage and emerging growth companies. Her broad experience includes aiding startups in industries as varied as IT, medical devices, clean tech, and mobile applications. She also represents venture capital funds, angel funds, and other investors. She also represents venture capital funds, angel funds, and other investors. Melissa’s broad background helps her lead the firm’s Venture Capital Practice Group and Start-up & Emerging Businesses Practice Group.
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