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SEC Announces Proposed Amendments to the Definitions of “Accredited Investor” and “Qualified Institutional Buyer”

On December 18, the Securities and Exchange Commission voted to propose amendments (the Proposal) to the definition of “accredited investor” for purposes of private placements under Regulation D and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act of 1933. The Proposal is intended to update and improve the definitions of those terms in order to more effectively identify both institutional and individual investors with the sophistication to participate in private capital markets transactions. In the SEC’s press release announcing the Proposal, SEC Chairman Jay Clayton noted that, “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only [on] a person’s income or net worth. Modernization of this approach is long overdue.” As highlighted in the fact sheet included in the press release, the Proposal would, among other things:

  1. add new categories of qualifying natural persons to the definition of accredited investor, including (A) individuals with certain professional certifications and designations (such as Series 7, 65 or 82 licensure or other credentials issued by accredited educational institutions); or (B) individuals who are “knowledgeable employees” (as defined under the Investment Company Act of 1940 (the Investment Company Act)) of a hedge fund, venture capital fund or private equity fund for purposes of investing in that fund;

  2. add new categories of qualifying entities to the definition of accredited investor, including limited liability companies that meet certain conditions (consistent with existing SEC staff guidance), registered investment advisers and rural business investment companies (RBICs); “family offices” with at least $5 million in assets under management and their “family clients” (as such terms are defined in the Investment Advisers Act of 1940); and, as a so-called “catch-all” category, entities (including Indian tribes) owning in excess of $5 million in “investments” (as such term is defined under the Investment Company Act);

  3. permit “spousal equivalents” (in addition to spouses) to pool their finances for purposes of qualifying as accredited investors (as it has not been clear that persons in legally recognized unions, such as domestic partnerships, civil unions and same-sex marriages, would currently be considered spouses for purposes of the accredited investor definition);

  4. expressly include limited liability companies and RBICs as entities that are eligible to be considered “qualified institutional buyers” as defined in Rule 144A so long as they meet the $100 million in securities owned and investment threshold in the definition; and

  5. permit an institutional accredited investor under Rule 501(a) of Regulation D, of an entity type not already included in the qualified institutional buyer definition, to so qualify if it satisfies the $100 million threshold.

The Proposal would not adjust the current net-income or net-worth standards or impose any limit on the amount that a person may invest under those standards.

The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.

The Proposal is available here, and the press release and fact sheet are available here.

©2020 Katten Muchin Rosenman LLP

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About this Author

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a selection of Mark’s engagements.

  • Representation of hospitality company in connection with its initial public offering and listing on NYSE, as well as ongoing counseling with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed public company in the banking industry in connection with strategic transactions, capital raising transactions, compliance with securities laws and NYSE rules, disclosure and corporate governance matters, including strategic acquisitions, notes offering and at-the-market offering.
  • Representation of clean tech manufacturer for industrial equipment in connection with alternative public offering and listing on NASDAQ, as well as ongoing counseling with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed issuer in connection with selling stockholder block trades.
  • Representation of NYSE-listed industrial manufacturer with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed medical device company with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
312-902-5612
Associate

Alyse Sagalchik concentrates her practice on corporate matters, with an emphasis on mergers and acquisitions, joint ventures, private equity and securities transactions. Alyse also advises companies on a broad range of general corporate, federal securities laws and corporate governance matters, including Securities Exchange Act of 1934 reporting and disclosure matters. She has represented strategic and financial buyers and sellers in M&A transactions ranging in value from $10 million to more than $15 billion and spanning a wide variety of industries, including health...

312.902.5426
Susan Light, Katten Law Firm, Finance Law Attorney, New York
Partner

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

...
212-940-8599
Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...

312-902-5452