SEC Amendments Expand Private Markets for Investors

New amendments from the Securities and Exchange Commission (SEC) will expand the pool of eligible investors available for private offerings, benefiting both would-be investors and companies looking to raise capital. Towards the end of last year, the SEC proposed amendments to its definition of “accredited investor” in Securities Act Rules 215 and 501(a), and to the definition of “qualified institutional buyer” (QIB) in Rule 144A.3 T. The amendments, confirmed on August 26, make more investors eligible, as “accredited investors,” to participate in private capital markets.

The original definition of “accredited investor” limited investment in private offerings to those people with specific income or net worth. Previously, would-be investors were assessed on their financial profile, usually requiring a minimum income of $200,000 (or $300,000 for spouses), or a minimum net worth or asset ownership of $1 million, either individually or jointly. With the new amendments, both individual and institutional investors who don’t pass the existing tests for income or net worth but meet defined measures of professional knowledge, or expertise, may now qualify to be “accredited investors.”

The amendments:

Qualify potential investors based on certain professional certification and designation (e.g. Series 7, 65, or 82 licenses)
Base eligibility for “accredited investors” in private investment funds, including private equity funds and hedge funds, on a person’s status as a “knowledgeable employee” of the fund
Add limited liability companies (with some limitations,) registered investment advisers, and rural business investment companies (RBICs) to those entities that qualify as “accredited investors”
Include a new category for any entity, including governing bodies of Native American tribes that own investments in excess of $5 million
Include family offices with a minimum of $5 million in assets, and their “family clients”
Add the term “spousal equivalent” to the definition of “accredited investor,” allowing spousal equivalents to pool their finances in order to qualify (spouses with a combined income of $300,000 can meet the income tests)

Amendments to the definition of QIBs would add limited liability companies and RBICs to those eligible for QIB status, provided they meet the threshold of $100 million owned and invested in securities of non-affiliated issuers.

The amendments form part of the SEC’s objective to open private markets to a wider range of investors. Expanding the pool of eligible investors means that eligibility can be measured by financial sophistication rather than wealth, and offers many benefits, particularly to start-ups and newly established companies that rely on private securities offerings to raise essential capital.

Melanie Waddell, writing for Think Advisor, quotes a statement from SEC chairman Jay Clayton:

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth but also based on established, clear measures of financial sophistication. I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”

For potential investors, interested in accessing the lucrative private equity and private debt markets, the SEC’s amendments mean that education and experience – financial sophistication – now counts just as much as wealth. For companies looking to raise capital, the amendments mean there is suddenly a far larger pool of qualified people to be targeted for investment.