SEC Proposes Changes to Accredited Investor Definition to Broaden Scope

SEC Proposes Changes to Accredited Investor Definition to Broaden Scope

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On December 18, 2019, the SEC announced proposed changes to the definition of “accredited investor.” This proposed rule is directly tied with a concept release in June of this year in which the SEC is seeking to modernize and harmonize security offerings. According to the release, there were a considerable amount of comments asking for an update to the qualifications for accredited investors. The current definition is largely dependent on certain income and net wealth requirements for natural persons and excludes certain entities and Indian tribes.

The proposed changes would add additional categories in which a natural person or entity can be considered an accredited investor. The proposed definition would include the following criteria to meet the definition of accredited:

  • A person who holds a professional designation or certification such as Series 7, 65 or 86, or certain other certifications from accredited organizations or institutions.
  • With respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund.
  • Certain limited liability companies, registered investment advisers and rural business investment companies.
  • An additional category for any entity, including Indian tribes for the first time, that own “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act) in excess of $5 million and the entity was not formed for the sole purpose on investing in securities.
  • “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.
  • Allowing “spousal equivalents” to pool their money for the net income requirements. (Note: Previously it was unclear if domestic partnership or same-sex marriages were included in the definition of “spouse”).

The proposed amendments would also add limited liability companies and rural business investment companies to the definition of a qualified purchaser if they meet the $100 million investment threshold. Additionally, the proposal contains a “catch-all” for institutional accredited investors to be included into the definition of “qualified institutional buyers.”

Mainly, this will affect private funds relying on the 3(c)1 exemption. If these proposed changes remain in the final rule, the number of investors who meet the definition of “accredited” will expand. The proposed rule will be in a 60-day comment period. Greyline anticipates that the industry’s comments will generally be favorable due to the fact that it will increase participation in these offerings. Likewise, the industry has long sought to expand the definition because a simple income and net worth requirement are not always the best means to determine if a person has a certain level of sophistication or securities knowledge.

Please find the SEC’s release and proposed rule here.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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