Regulation D of the Securities Act of 1933 (the “Act”) is a common exemption from registering securities under Section 5 of the Act. The exemption provides that registration is not required when an issuer conducts a private offering under certain conditions. One important requirement is that most investors be “accredited investors” as defined by the Act. Any investor familiar with private offerings is undoubtedly aware of the accredited investor definition and is directly impacted by these changes.
The United States Securities and Exchange Commission (“SEC”) is charged with, among other things, promoting the securities markets and protecting investors. Every offer and sale of securities must be registered with the SEC pursuant to Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), unless subject to an exemption. In private markets, the registration requirement is exempted under certain exemptions, when disclosure requirements are limited, and securities offerings in private markets are only available to investors as pursuant to certain exemptions, including Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). Some exemptions allow limited participation by non-accredited investors, but by and large, the private markets are restricted to “sophisticated” investors who qualify as “Accredited Investors.” The SEC considers accredited investors to be sufficiently sophisticated in financial matters to justify the exemption from the stringent securities registration requirements Contrarily, some believe access to private markets should be further expanded. SEC Commissioner Hester Peirce tweeted Wednesday: “Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them ‘no, unless you’re rich.’” Commissioners Lee and Crenshaw voted against the changes, stating that the amendments leave the wealth threshold, discussed below, unchanged.
Prior to Expansion
Under Section 501 of Regulation D, the Securities Act defines an “Accredited Investor” in categories:
- A natural person is an accredited investor if he or she:
- has income exceeding $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse); and
- reasonably expects to reach the same income level in the current year; or
- has net worth exceeding $1 million (individually or jointly with a spouse), excluding the value of a primary residence.
- Certain entities qualify as accredited investors if they have over $5 million in assets.
Other categories of accredited investors include:
- Any nonprofit organization, corporation, business trust, trust or partnership not formed for the specific purpose of acquiring the securities offered with total assets in excess of $5 million.
- Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.
There has been a long-standing debate in the legal and financial communities regarding who can participate in securities offerings in private markets. In 2012, the Small Business Forum recommended a “top-to-bottom review of the exempt offering landscape.” In 2015, the staff of the SEC released a “’Report on the Review of the Definition of “Accredited Investor’”, examining a variety of new approaches to the definition. As part of its mandate, the SEC presumes “Accredited Investors” possess sufficient financial sophistication, can adequately protect against and sustain related losses, and can “fend for themselves.” Regulation D is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” See, Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015].
On June 18, 2019, the SEC requested comments in the “Concept Release on Harmonization of Securities Offering.” Many recommendations by commenters were not contemplated in the staff recommendations, including: (1) self-certification and (2) retain professionals to advise non-accredited investors in order to qualify as accredited.
On August 26, 2020, the SEC announced amendments to the definition of an “Accredited Investor”, to take effect 60 days after the Final Rule’s publication in the Federal Register. These amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act. Rule 215 has been revised to replace the existing definition, replaced by a cross reference to Rule 501(a). Rule 144A has been revised to expand the definition of “qualified institutional buyer,” to include limited liability companies (“LLCs”) and rural business investment companies and (“RBICs”), among other institutional investors, so long as they satisfy the $100 million threshold. Rule 501(a) has been revised and expanded to include:
- Natural persons, based on “certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.” These include holders in good standing of the Financial Industry Regulatory Authority (“FINRA”) Series 7, Series 65, and Series 82 licenses.
- With respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund.
- Clarification that LLCs, RBICs, SEC- and state-registered investment advisers, exempt reporting advisers may qualify
- A new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- “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 of 1940, as amended; and
- “Spousal equivalents,” who may pool their finances for the purpose of qualifying as accredited investors.
Why it matters to you
- Access to private markets will allow more individuals to participate in initial public offerings, private placements, and other investment opportunities.
- Regulation D also restricts who can be solicited to participate in investment opportunities. The expansion of the definition will afford businesses more opportunities to grow and expand.
- The SEC reserves the right to change which certifications, designations or credentials qualify a natural person as an accredited investor.
- Noticeably excluded are: (1) attorneys; and (2) holders of the new Securities Industry Essentials (“SIE”) FINRA certification, which allows individuals without sponsorship by a broker-dealer to hold a FINRA license. As a result, this includes financial industry representatives, but excludes individuals who passed the introductory SIE exam designed to replace the Series 7 as the introductory exam. The SIE certification dispels with the requirement that an employer sponsors an employee.For more information: contact Michael J. Zussman, 908-827-2500, , or Jacob Shulman, 908-964-2464,
 17 CFR 230.501(a) (“Rule 501(a)”).
 17 CFR 230.501(a)(6).
 17 CFR 230.501(a)(5).