The Securities and Exchange Commission (“SEC”) voted to propose amendments to its definition of an “accredited investor,” which, if approved, will allow more investors access to invest in private offering opportunities.
Aiming to expand the definition to include individual investors who have appropriate knowledge and expertise to participate in capital markets, the SEC proposal adds to the current definition new categories of natural persons based on professional experience or certifications.
If the proposal is accepted as drafted, individuals with investment industry designations, including the Series 7, 65, 82, and those with other credentials issued by accredited institutions will newly qualify as accredited investors. Additionally, individuals can qualify as “knowledgeable employees” of private funds, certain limited liability companies and rural business investment companies (“RBICs”), and entities owning “investments” in excess of $5 million (including Indian tribes and “family offices” (a newly defined term in the proposal) may qualify.
A new category for any entity owning more than $5 million in investments, intended as a “catch all,” is included in the revised definition.
The drafted proposal also expands the Qualified Institutional Buyer definition to include limited liability and RBICs once they meet a threshold of $100 million in owned securities.
Commissioner Lee’s Opposition Statement:
Commissioner Allison Herren Lee, who was appointed to the SEC in July 2019 and has over two decades of experience as a securities law practitioner, released a public statement in opposition of the proposal.
In particular, she notes concern that the proposed $5 million wealth threshold is over-inclusive and would include investors with little or no ability to assess or bear the risks of private offerings. Commissioner Lee provides an example of an individual who contributed $200 per month over a 50-year period, accruing $1 million in assets with a 7% average return rate. Individuals in similar situations would be eligible to invest in private markets but not qualified to assess the risks. Further, she argues they could potentially lose a lifetime of savings.
She also poses a concern about the proposal’s failure to index for both past and future inflation, an effort for which there is widespread support from SEC advisory committees as well as investors, industry groups, state regulators, crowdfunders, and academics.
Her statement also discusses the proposal’s assertion that there is better access to information on the internet and social media providing individuals with opportunities to learn more about offerings. Commissioner Lee raises the concern that the proposal does not acknowledge the amount or type of information available with respect to privately held issuers nor does it address all of the misinformation available or the lack of sophistication of many individuals to discern credible information from misinformation.
Commissioner Lee urges experienced firms to submit suggestions and comments as she hopes data and insights from the public will help draft a better final revision to the updated definition.
Let Us Help Share Your Experience
If your firm or advisers have noted trends or methodologies that would help the SEC to more accurately depict investor sophistication or if you have other comments or considerations, the SEC may benefit from your ideas. The comment period for this proposal ends on February 16, 2020. To submit your comments, use the SEC’s internet Submission form or send an email to email@example.com.
If you have any questions about how this proposal may affect your firm, contact Jacko Law Group and our team of attorneys today at 619-298-2880.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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