The SEC Proposes to Expand the Category of Individuals Qualifying as “Accreditor Investors” under the Regulation D Private Placement Exemption

The Securities and Exchange Commission (the “SEC”) has announced that it is proposing to expand the scope of those individuals who qualify as an “accredited investor” under the Regulation D private placement exemption under the Securities Act of 1933 (the “Securities Act”).

The term “accredited investor” is defined in Rule 501(a) of Regulation D.  Regulation D provides perhaps the most common exemption from the requirement under the Securities Act to register an offer and sale of securities with the SEC.  Among its other conditions, Regulation D allows investors (whether institutions or natural persons) that qualify as an accredited investor to take part in investment opportunities that are not available to the general public.  The requirement for an investor in a Regulation D offering to satisfy the accredited investor definition is, according to the SEC, a cornerstone of Regulation D and is meant to protect investors who do not qualify and thus are presumed not to have the financial knowledge to properly judge the risks of such an investment or sufficient wealth to suffer a potential loss of their investment. Conversely, those who fall under the scope of the accredited investor definition, in theory, have the financial sophistication or wealth which makes the protection of the Securities Act’s SEC registration process unnecessary.

In 2020, the SEC most recently adopted various amendments to the definition of “accredited investor” to add new categories of qualifying natural persons and entities. ^[1]Among such amendments was the addition of Rule 501(a)(10) which provides that individuals who are holders in good standing of certain professional certifications or credentials can qualify for accredited investor status if the SEC so designates them after notice and an opportunity for public comment^.[2]At the time of the 2020 amendment, the SEC approved three categories of credentials which would confer accredited investor status on the individual holder under this exemption: the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82) and the Licensed Investment Adviser Representative (Series 65). Rule 501(a)(10) provides the basis for the SEC’s current proposed expansion of accredited investors to include those who hold various other licenses or credentials as described in more detail below.

Currently the definition of accredited investor includes various types of institutions as well as various categories of natural persons^[3], principally:

• any director, executive officer or general partner of the issuer of the securities being offered or sold or of a general partner of that issuer
• individuals who have a net worth exceeding $1,000,000 (excluding the value of their primary residences), either alone or with their spouse or spousal equivalent
• individuals who have annual income greater than $200,000 (or $300,000 combined with such person’s spouse or spousal equivalent) in each of the two most recent years and have a reasonable expectation of reaching that income level in the current year
• individuals who are holders in good standing of one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as such
• individuals who are “knowledgeable employees”, under the Investment Company Act of 1940, of the private-fund issuer of the securities being offered or sold
• individuals who are “family clients” of a “family office” under the Investment Advisers Act of 1940 and whose prospective investment in the issuer is directed by such family office

The SEC is now proposing to expand the definition of accredited investor by adding to the definition individuals with the following professional designations :

• a license as a U.S. certified public accountant (CPA)^[4]
• a charter as a Chartered Financial Analyst (CFA)^[5]
• a certification as a Certified Financing Planner (CFP) in the United States^[6]
• the FINRA Investment Banking Representative license (Series 79) or the FINRA Research Analyst license (Series 86 and Series 87)^[7]

In addition to the foregoing new designations, the SEC is also proposing the creation of a special examination intended to assess the exam taker’s financial sophistication and comprehension of securities and investing as another means of qualifying individuals as accredited investors.  The Financial Institutions Regulatory Authority, Inc. (FINRA), a self-regulatory authority subject to SEC oversight, would develop and administer such examination.  Individuals passing the exam would be deemed an accredited investor. ^[8]

These proposals are meant to capture investors who exhibit a certain level of financial sophistication and thus do not require the protection afforded by the SEC registration requirements under the Securities Act. SEC Chairman Paul Atkins, in his comments on the proposal, also mentioned that these expansions are meant to signify that financial thresholds are not the only measure of an individual’s ability to evaluate the value and risks of an investment.

The public comment period for these proposals will remain open for 60 days after the date of publication of the notices in the Federal Register. If you have any questions about the proposed changes or need assistance in submitting comments to the SEC in response to the proposals, please contact one of the partners listed below or your primary attorney at Seward & Kissel LLP.