September 3, 2020
On August 26, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments (the “Amendments”) to the private placement definition of “accredited investor” in Regulation D under the Securities Act of 1933 (the “Securities Act”). The SEC’s primary objective of the Amendments is to expand the pool of accredited investors to include investors that have the knowledge and expertise to assess the risks of illiquid privately offered securities. The Amendments will be effective October 25, 2020.
Regulation D is the most commonly relied upon exemption from the registration requirements of the Securities Act for private placements. In 2019, private placements raised an estimated $1.5 trillion of capital, compared to approximately $1.2 trillion raised in registered offerings. The definition of “accredited investor” is integral to the applicability of the Regulation D exemption. Thus, the expansion of the types of investors who qualify as accredited investors will make private placements available to a greater number of potential investors. The SEC intends that expanding the pool of accredited investors will increase the availability of capital that can be efficiently raised by issuers in the private capital markets.
Of particular note is that the Amendments do not change the current dollar thresholds under certain commonly relied upon provisions of the accredited investor definition which are generally:
The SEC chose not to raise these dollar thresholds, which have remained at the levels set in the 1980s, to adjust for the cumulative effect of inflation because it did not want to reduce the number of natural persons and entities qualifying as accredited investors. Consistent with maintaining those dollar thresholds, the SEC expanded the concept of combined finances with a “spouse” to include a “spousal equivalent.” As likewise defined in other SEC rules, a “spousal equivalent” is a cohabitant with a relationship generally equivalent to that of a spouse.
As provided for in the Securities Act, the SEC has determined through the Amendments that the following types of investors have the requisite financial sophistication, knowledge and experience in financial matters to be added to the definition of accredited investor:
Limited liability companies (“LLCs”) with total assets in excess of $5 million are now included in the definition among the types of entities that are considered to be an accredited investor. The SEC considers this a clarification, rather than an expansion, as it intended that Regulation D reflect its longstanding SEC staff interpretations that LLCs were eligible to be accredited investors if they met the other requirements of the definition.
If you would like to discuss the effects of the Amendments to your business or have questions, please contact Robert A. Greising, Robert J. Wild, Corben A. Lee, Charles O. Richert, or any other member of our Business, Acquisitions & Securities team.