Notably, the Proposal would:
The Proposal follows closely on the heels of the Concept Release on Harmonization of Securities Offering Exemption (Concept Release) the SEC published in June 2019.2 The Concept Release solicited feedback as to whether (among other things) the SEC should make certain revisions to the accredited investor definition and the Rule 144A safe harbor. If the Proposal is adopted, the accredited investor standard would receive the facelift that SEC Chairman Jay Clayton3 and many industry participants believe is long overdue.
Section 4(a)(2) of the Securities Act of 1933 provides that an offering of securities that does not involve a “public offering” is exempt from registration. Regulation D under the Securities Act provides safe harbors from the registration requirements of the Securities Act for private offerings that are made primarily or exclusively to persons who are accredited investors. Generally, accredited investors are deemed to have the financial sophistication to participate in private offerings without the protections contained in the Securities Act. The current definition of accredited investor relies on income or net worth as the main proxies for financial sophistication.
In determining whether to approve a credential, factors that the SEC will consider include (among others) that:
It is expected that the following certifications or designations will appear on the initial list of approved credentials: Series 7, Series 65 and Series 82 licenses.
The Proposal also would add the following categories of entities to the definition of accredited investor:
The Proposal would make certain conforming amendments to Rule 144A (which provides a safe harbor for certain resales of restricted securities to qualified institutional buyers from the registration requirements of the Securities Act), including a new catch-all category for entities that are institutional accredited investors (as defined in the Securities Act) that are not any of the types of entities expressly included in Rule 144A and which otherwise own and invest on a discretionary basis $100 million or more of assets in issuers that are not affiliated with the entity.
The Proposal sets forth a number of requests for comment regarding the proposed amendments. Industry participants should consider submitting feedback to the SEC on these proposed changes. The public comment period will remain open until March 15, 2020.
1) Amending the “Accredited Investor” Definition, Securities Act Release No. 10734 (Dec. 18, 2019). The Proposal was approved by a 3-2 vote along party lines. Commissioner Robert J. Jackson Jr. dissented on grounds that the Proposal lacked adequate cost analysis and Commissioner Allison H. Lee dissented on grounds that the financial thresholds required for participation in private offerings are overly inclusive and not indexed to inflation.
2) Concept Release on Harmonization of Securities Offering Exemptions, Securities Act Release No. 10649 (June 18, 2019). For further information, please refer to Dechert OnPoint, SEC Publishes Concept Release on Hormonization of Securities Offering Exemptions; Comment Deadline Approaching.
3) See e.g., Jay Clayton, Remarks to the Economic Club of New York (Sept. 9, 2019) (“We should … increase the type and quality of opportunities for our Main Street investors in our private markets.”)
4) The Proposal cites to the Wolf, Block, Schorr and Solis-Cohen, SEC Staff No-Action Letter (Dec. 11, 1996) and question number 255.05 of Securities Act Rules Compliance and Disclosure Interpretations.