House votes to expand ‘accredited investor’ definition

The bill moves to allow financially-savvy investors who do not meet current income requirements to invest in private funds.

The US House of Representatives has passed a bipartisan bill broadening the definition of an “accredited investor,” promising to expand the capital pool available for private funds.

For investor protection purposes, GPs cannot solicit commitments from investors who do not meet the US Securities and Exchange Commission’s (SEC’s) accredited investor definition.

Currently, an accredited investor is characterised in the Securities Act of 1933 as an individual whose net worth is at least $1 million (not including his or her house); an individual who has earned at least $200,000 per year in the past two years; or an individual whose household income has totaled at least $300,000 per year in the past two years.

The House’s Fair Investment Opportunities for Professional Experts Act (HR 2187) moves to expand eligibility beyond these financial parameters, adding anyone who is registered as a broker or investment adviser or who has “professional knowledge” of a particular investment based on their demonstrable education or experience.

The bill also revises the net worth threshold, requiring an adjustment for inflation every five years.

The bill, sponsored by Rep. David Schweikert (R­-AZ), passed in the House on Monday on a recorded vote of 347-8. It is now being read by the Senate Committee on Banking, Housing, and Urban Affairs.

An update to the accredited investor definition has been in the works since October 2014, when an SEC task force recommended redefining the language to let financially-savvy investors who do not meet the current income thresholds invest in private funds.

“For private equity managers, the expanded definition means they will have new investors they can possibly target and let into their funds, and also that they may have greater participation from their own employees in their funds,” said Ropes & Gray private equity partner Peter Laybourn in a call with Private Equity International's sister title pfm.

If the bill passes in the Senate, it will still be some time before the effects of a broader investment pool are felt by the private funds industry, noted Laybourn, as the SEC will need to develop a test by which to judge whether or not a person has the “professional knowledge” necessary to qualify.