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IP Updates

SEC Proposes Change to "Accredited Investor" Rules

January 12, 2007

IP Updates

SEC Proposes Change to "Accredited Investor" Rules

January 12, 2007

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SEC is proposing a change to the definition of “accredited investor” which would apply only to

I. Overview

 

 

  • SEC is proposing a change to the definition of “accredited investor” which would apply only to investments in certain pooled investments intended to be primarily hedge funds. As proposed, this definition would not apply to direct investments in operating companies.

 

II. Proposal

 

 

  • “Accredited Natural Person”
  • Requirements
    • For an individual to invest in certain pooled investment vehicles, the individual would have to satisfy the existing definition of “accredited investor” contained in Rule 501(a) of ’33 Act (either $1 million in net worth or $200k income individually, or $300K with spouse), plus additional requirement contained in proposed new Rule 216 that the individual have at least $2.5 million in “investments,” as defined therein to include:
    • Securities, except for securities of most companies controlled by the individual
    • Real estate held for investment purposes (but not a personal residence or place of business)
    • Commodity Interests (futures, options, etc.)
    • Physical commodities held for investment purposes
    • Cash and cash equivalents
    • Bank deposits, CDs, etc.
  • Applicability
    • Only applies to investments in a “private investment vehicle other than a venture capital fund”
      • Private investment vehicle means any issuer that would be an investment company as defined in section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) but for the exclusion provided for in section 3(c)(1)(15 U.S.C. 80a-3(c)(1)) of that Act.
      • Venture capital fund has the same meaning as “business development company” in section 202(a)(22) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(22)).

 

III. Status

 

 

 

IV. Conclusion

 

 

  • Assuming rules adapted as proposed, this will not affect the definition of “accredited investor” for purposes of direct investments in operating companies. It will significantly reduce pool of potential investors for hedge funds, but should not affect fundraising by most VC funds, most of which qualify as a “business development company” under the ’40 Act. However, VC funds and their investors should confirm that the particular fund in question either so qualifies, or that investments are limited to “accredited natural persons.”

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