In December 2019, the Securities and Exchange Commission (SEC) proposed updates to its rules regulating participation by investors in private placements. The proposal seeks to update and improve the definition of "accredited investor" to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in securities offerings made other than by way of an SEC-registered public offering. Accredited investors are eligible to participate in private placements structured under the Regulation D safe harbour, which provides an exemption from SEC registration.
Under the SEC's rule proposal, the accredited investor definition would be expanded to include the following categories of natural persons and entities:
- natural persons who have certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
- with respect to investments in a private fund, "knowledgeable employees" of the fund;
- limited liability companies (LLCs) that meet certain conditions, registered investment advisers and rural business investment companies (RBICs);
- any entity, including Indian tribes, owning "investments", as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; and
- "family offices" with at least $5 million in assets under management and their "family clients", as each term is defined under the Investment Advisers Act.
The rule changes would also add the term "spousal equivalent" to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The SEC is also proposing to update the definition of "qualified institutional buyer" (or QIB) for purposes of the Rule 144A safe harbour, which allows large institutional investors with an investment portfolio of at least $100 million to participate in private offerings. The rule change would add LLCs and RBICs to the types of entities eligible to qualify as QIBs, as well as a catch-all for other institutional accredited investors that meet the $100 million investment threshold.
The 60-day public comment period on the proposed rule is now open. Changes to the SEC's rules will not take effect until the SEC publishes a final rule.
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