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Proposed Rule: Amending the "Accredited Investor" Definition

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Proposed Rule: Amending the SECURITIES AND EXCHANGE COMMISSION 17 CFR PARTS 230 and 240 Release Nos. 33-10734; 34-87784; File No. S7-25-19 RIN 3235-AM19 Amending the “Accredited Investor” Definition AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: We are proposing amendments to the definition of “accredited investor” in our rules to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition. The proposed amendments are intended to update and improve the definition in order to identify more effectively institutional and individual investors that have the knowledge and expertise to participate in our private capital markets and therefore do not need the additional protections of registration under the Securities Act of 1933. Specifically, the proposed amendments would add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee;” expand the list of entities that may qualify as accredited investors and allow entities meeting an investments test to qualify; add family offices with at least $5 million in assets under management and their family clients; and add the term “spousal equivalent” to the definition. We are also proposing amendments to the qualified institutional buyer definition in Rule 144A under the Securities Act that would expand the list of entities that are eligible to qualify as qualified institutional buyers. DATES: Comments should be received on or before March 16, 2020. ADDRESSES: Comments may be submitted by any of the following methods: Electronic comments: Use the Commission’s Internet comment form (http://www.sec.gov/rules/proposed.shtml); or Send an email to [email protected]. Please include File Number S7-25-19 on the subject line. Paper comments: Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-25-19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission’s website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549-1090 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file 2 of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by e-mail. FOR FURTHER INFORMATION CONTACT: Charles Kwon, Senior Counsel, Office of Rulemaking, or Charlie Guidry, Special Counsel, Office of Small Business Policy, at (202) 551-3460, Division of Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at (202) 551-6999, Investment Adviser Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR 230.144A (“Rule 144A”), 17 CFR 230.163B (“Rule 163B”), 17 CFR 230.215 (“Rule 215”), and 17 CFR 230.501 (“Rule 501”) of 17 CFR 230.500 through 230.508 (“Regulation D”) under the Securities Act of 1933 (“Securities Act”);1 and 17 CFR 240.15g-1 (“Rule 15g-1”) under the Securities Exchange Act of 1934 (“Exchange Act”).2 TABLE OF CONTENTS I. INTRODUCTION ....................................................................................................5 II. PROPOSED AMENDMENTS TO THE ACCREDITED INVESTOR DEFINITION .....................................................................................................................14 A. Background .........................................................................................................14 B. Adding Categories of Natural Persons Who Qualify as Accredited Investors ...21 1. Professional Certifications and Designations and Other Credentials ................. 21 2. Knowledgeable Employees of Private Funds ..................................................... 39 3. Proposed Note to Rule 501(a)(5) ....................................................................... 46 C. Adding Categories of Entities that Qualify as Accredited Investors ..................47 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. 3 1. Registered Investment Advisers ......................................................................... 47 2. Rural Business Investment Companies .............................................................. 50 3. Limited Liability Companies ............................................................................. 51 4. Other Entities Meeting an Investments-Owned Test ......................................... 55 5. Proposed Note to Rule 501(a)(8) ....................................................................... 59 6. Certain Family Offices and Family Clients ........................................................ 60 D. Permit Spousal Equivalents to Pool Finances for the Purposes of Qualifying as Accredited Investors .......................................................................................................65 E. Proposed Amendment to Rule 215......................................................................67 F. Proposed Amendment to Rule 163B ...................................................................69 G. Proposed Amendment to Exchange Act Rule 15g-1 ...........................................71 III. ADDITIONAL REQUESTS FOR COMMENT ON THE ACCREDITED INVESTOR DEFINITION ................................................................................................73 IV. PROPOSED AMENDMENT TO THE QUALIFIED INSTITUTIONAL BUYER DEFINITION .....................................................................................................................88 V. IMPLICATIONS FOR OTHER CONTEXTS .......................................................94 VI. GENERAL REQUEST FOR COMMENT .............................................................98 VII. ECONOMIC ANALYSIS ......................................................................................98 A. Introduction .........................................................................................................98 B. Broad Economic Effects ....................................................................................100 C. Baseline and Affected Parties ...........................................................................107 D. Anticipated Economic Effects ...........................................................................114 1. Potential Benefits to Issuers ............................................................................. 115 2. Potential Benefits to Investors .......................................................................... 120 3. Potential Costs to Issuers .................................................................................. 124 4. Potential Costs to Investors .............................................................................. 125 5. Variation in Economic Effects ......................................................................... 129 6. Competition, Efficiency, and Capital Formation ............................................. 131 7. Alternatives ...................................................................................................... 133 VIII. PAPERWORK REDUCTION ACT .....................................................................140 IX. SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT ......141 X. INITIAL REGULATORY FLEXIBILITY ANALYSIS ......................................141 A. Reasons for, and Objectives of, the Proposed Action .......................................142 B. Legal Basis ........................................................................................................142 C. Small Entities Subject to the Proposed Rule .....................................................142 4 D. Projected Reporting, Recordkeeping and Other Compliance Requirements ....143 E. Duplicative, Overlapping, or Conflicting Federal Rules ...................................144 F. Significant Alternatives .....................................................................................144 G. Request for Comment........................................................................................145 XI. STATUTORY AUTHORITY AND TEXT OF PROPOSED RULE AMENDMENTS .............................................................................................................145 I. INTRODUCTION On June 18, 2019, the Commission issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act of 1933 to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.3 In the Concept
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