On December 18, the Securities and Exchange Commission by a three to two vote, voted to propose amendments to the definition of “accredited investor,” one of the principal tests applied under the federal securities laws for determining who is eligible to participate in transactions that are not required to be registered with the SEC. Such transactions are commonly referred to as “private capital markets” transactions. In the words of the SEC, the proposal “seeks to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.”

In announcing the proposal, Jay Clayton, Chairman of the SEC, asserted that: “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. . . The proposal would add other means for natural persons to qualify to participate in our private capital markets based on established, clear measures of financial sophistication . . . .” For example, natural persons could qualify as accredited investors based on their professional knowledge and experience, as evidenced by them having obtained professional certifications. Another welcomed aspect of the proposal highlighted by the Chairman is that it “specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in private capital markets” transactions if they meet certain investment thresholds. Proposed Rule.