The SEC has issued proposed amendments to the definition of an Accredited Investor — but will it really help you raise money? 

On Dec. 18th, 2019, the SEC issued proposed amendments to the definition of an Accredited Investor. If you read any financial or legal news feeds on the internet, you may have seen this. On its face, it sounds hopeful, but is it really going to help you raise money from private investors? Probably not in its proposed form, but there are some other topics of discussion at the SEC that may actually make a difference. Let’s dive in and see what’s really going on at the SEC that could actually be helpful:

On Dec. 5, 2019, the SEC released its report on the 38th Annual Government-Business Forum on Small Business Capital Formation. The report was the result of a meeting which took place in Omaha, Nebraska on Aug. 14, 2019, hosted by the Office of the Advocate for Small Business Capital Formation. This annual event allows members of the public and private sectors to openly discuss proposed reforms related to securities policy impacting small businesses that raise money via securities offerings, public and private.

The 2019 Forum focused on several topics, listed below, that could positively affect that ability of real estate syndicators and startup businesses engaging in Regulation D exempt offerings to raise money from private investors:

  1. Expanding the Accredited Investor definition (more on this below);
  2. Re-defining “finders” and making a clear distinction on when broker-dealer licensing would be required (current definition says “engaging in the business of effecting transactions in securities”) (sounds hopeful);
  3. Expanding access to certain pooled investment vehicles under Regulation D to include non-Accredited Investors (could be promising);
  4. Amending the Regulation Crowdfunding exemption to increase the overall limit (currently $1 million) and remove restrictions on how much accredited investors can invest (may be useful);
  5. Providing a new exemption for “Micro-Offering” raises of up to $25,000 (not so much).

At this time, the only one of the above priorities that has become a proposed rule is the expansion of the Accredited Investor definition. All the rest are currently pending further review by the various agencies tasked with following up. The fact that the regulators are talking about these things — and assigning priorities to them — is in itself a step in the right direction.

The specific proposed amendments to the Accredited Investor definition include:

  • Allowing natural persons to qualify as Accredited Investors based on certain professional certifications and designations[1], or other verifiable credentials issued by an accredited educational institution;
  • Allowing a “knowledgeable employee” to invest in a fund offered by his or her employer;
  • Adding LLCs that meet certain conditions to the current list of entities that may qualify as accredited investors[2];
  • Adding a new category for any entity with assets or investments in excess of $5 million;
  • Adding “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[3]; and
  • Adding 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 proposed change to the Definition of an Accredited Investor was published in the Federal Register on Jan. 15, 2020, marking the start of a 60-day public comment period. The change is available for review at the following link:

https://www.govinfo.gov/content/pkg/FR-2020-01-15/pdf/2019-28304.pdf

If you want to comment on the proposed definition — and I encourage you to do so — please read the SEC’s proposed changes and requests for comment in Section II(B)(1) of the Federal Register publication (printed page 2579) and submit your comments at http://www.sec.gov/rules/proposed.shtml or email your comments to: rule-comments@sec.gov, using “Proposed Amendments to the Accredited Investor Definition” in the subject line.

In its current form, the SEC seems to be narrowly proposing that the Accredited Investor definition should only apply to FINRA-licensed securities professionals, which would only add ~700,000 new Accredited Investors to the current pool (some of which may already be accredited). Thus, unless the definition for natural persons is significantly expanded, it won’t help syndicators much, if at all.

For now, we must patiently wait to see what the final Accredited Investor definition becomes, as the various agencies also review possible revisions to the archaic Finder’s Rules and the other topics discussed in the 2019 Forum.

[1] Such as a Series 7, 65 or 82 license

[2] This proposed amendment also includes registered investment advisers and rural business investment companies (RBICs)

[3] Eligible “investments” are defined in Rule 2a51-1(b) under the Investment Company Act (includes, among other things, real estate held for investment purposes; commodity interests held for investment purposes; and physical commodities held for investment purposes; also applies to Indian tribes)

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