On December 18, 2019, the Securities and Exchange Commission (“Commission”) voted to, among other things, amend the definition of “accredited investor” for natural persons under Rule 501(a) of Regulation D. Currently, natural persons may qualify as accredited investors based on the following criteria
– Individuals who have a net worth exceeding $1 Million, excluding the person’s primary residence, either alone or with their spouses;
– Individuals who had an income in excess of $200,000 in each of the two most recent years, or joint income with the individual’s spouse in excess of $300,000 each of those years, and have a reasonable expectation of reaching the same income level in the current year; and
– Directors, executive officers, and general partners of a general partner of the issuer.
The proposed amendments would allow more individual investors to participate in private offerings (including venture capital investments) by adding new categories of natural persons who may qualify as accredited investors based on (i) their professional knowledge, experience, or certifications and (ii) individuals who are “knowledgeable employees” of a private fund and are investing in that private fund.
A. Professional Certifications
The Commission stated that it primarily expects the following certificates to be included in the final rule, if adopted: (i) Licensed General Securities Representative (Series 7); (ii) Licensed Investment Adviser Representative (Series 65); and (iii) Licensed Private Securities Offerings Representative (Series 82).
The proposed amendments would enable persons holding the above referenced designations as accredited investors even if they do not meet the income or net worth standards in the current accredited investor definition.
B. Knowledgeable Employees
Further, the Commission proposes to add a category to the accredited investor definition that would enable “knowledgeable employees” of a private fund to qualify as accredited investors for investments in the fund. Private funds, including venture capital and private equity funds, generally rely on Section 4(a)(2) and Rule 506(b) to offer and sell their interest without registration under the Securities Act. The proposed new category of accredited investor would be similar to the existing category for directors, executive officers, executive officers, or general partners of a general partner of the issuer (e.g. the private equity or venture capital fund).
The Commission stated in its proposal, “We believe that such employees, through their knowledge and active participation of the investment activities of the private fund, are likely to be financially sophisticated and capable of fending for themselves in evaluating investments in such private funds. These employees, by virtue of their position with the fund, are presumed to have meaningful investing experience and sufficient access to the information necessary to make informed investment decisions about the fund’s offerings. Allowing these employees to invest in the funds for which they work also may help to align their interests with those of other investors in the fund.”
You can read the proposed rule in its entirety here. Note, these proposals are not law and still need to go through legislation. This is an exciting and potentially useful expansion to allow for individuals who may not have had the time to accumulate the necessary wealth or to have been in the workforce for long enough to pass the income test. Kohnen & Patton will provide updates as this proposal amendment moves forward to possibly becoming law.