SEC Modernizes Accredited Investor Definition
The SEC adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in the private capital markets. Regulations have long barred individual investors who do not meet specific income or net worth tests from investing in the private markets. The SEC’s amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including any entity that meets an investments test. The SEC also designated as qualified persons individuals that are holders in good standing of the Series 7, Series 65, and Series 82 licenses; knowledgeable employees who work for a private fund, and certain registered advisors. In a joint statement Commissioners Allison Herren Lee and Caroline Crenshaw wrote, however, that the SEC’s actions “fail to ensure that the accredited investor definition functions effectively to protect vulnerable investors, fail to acknowledge and analyze existing data revealing the risks these choices pose for investors, particularly seniors, and fail, once again, to address the lack of data regarding private markets more broadly.” Commissioner Elad Roisman hailed the amendments for moving away from a single, wealth-based criterion and urged the SEC to further expand the definition of accredited investor to include knowledge-based eligibility, for example, SEC staff members who review registration statements for material disclosure and investigate potentially fraudulent activity in the markets. A client alert by lawyers from Faegre Drinker details the SEC’s amendments.