seC ProPoses aDDitionaL aCCreDiteD investor Categories
Securities Section
Chairs:EricFeld-WiandGuerraKingP.A.andJosefRosen-GrayRobinson,PA
the seC’s proposal is a
positive development for
capital formation, but the
proposed categories create
new issues to resolve.
As the Powerball jackpot neared
$1.6 billion, investor Mark Cuban
opined that “you don’t become a
smart investor when you win the
lottery.” 1 Cuban’s observation
could be applied to accredited
investors with limited investment
experience. The SEC has indicated
that accredited investors are
financially sophisticated and able
to sustain the loss of their entire
investment principal, which
“renders the protections of the
Securities Act’s registration process
unnecessary.” 2 Thus, issuers
can offer accredited investors
investment opportunities in “early
stage and high growth firms, in the
Regulation D market that are not
available to investors in registered
securities offerings.” 3 The SEC’s
Amending the “Accredited Investor”
Definition proposal puts forward
new categories that allow
additional natural persons and
entities to qualify as accredited
investors. The SEC’s proposal is a
positive development for capital
formation, but the proposed
natural persons categories create
new issues to resolve.
Regulation D provides issuers
safe harbors to offer and sell
securities without registering the
securities under the Securities Act
of 1933. Rule 501 of Regulation D
currently provides two primary
ways a “natural person” can
become an accredited investor:
• Individuals or married couples
with a net worth exceeding $1
million, excluding the value of
their primary residence; or
• Individuals with an income
greater than $200,000 or
married couples with an
income greater than $300,000
in each of the past two years
that anticipate earning the
same amount in the current
year.
The SEC proposal introduces
two new categories in which natural
persons can become accredited
investors. The first category includes
individuals who have attained
professional credentials that
demonstrate a background and
understanding of securities and
investing. 4 This category may
include, inter alia, CFAs, associated
persons of broker-dealers and
investment advisers, or persons
“having been in the securities
industry” as a lawyer or accountant. 5
The second category would
include knowledgeable employees
of a private fund that are investing
in their employer’s fund. 6
The SEC’s proposal is positive
for companies, because it will
facilitate capital formation and
provide high-growth investment
opportunities to more investors.
However, the SEC should place
limits on the percentage of net
worth that these proposed
accredited investors could invest
in private offerings, because they
have lower financial means than
existing accredited investors and,
thus, are less able to recover from
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MAR - APR 2020
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HCBA LAWYER