SEC proposes significant changes to “small business” and “small organization” definitions

On January 7, 2026, the US Securities and Exchange Commission (SEC) proposed amendments (Proposal) to the definitions of “small business” and “small organization” under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 for purposes of the SEC’s regulatory flexibility analyses.

Background
Federal law requires the SEC to analyze the economic impact of proposed rules on “small entities” and to consider alternatives that minimize regulatory burdens on those entities. For investment companies, the SEC’s rules define small entities based on net assets, aggregated across all investment companies within the same group of related investment companies. SEC rules define small entities for investment advisers based on regulatory assets under management and total assets, while also accounting for control relationships.

The SEC last updated these thresholds in 1998. As a result, the existing thresholds capture only a limited portion of the market. Currently, approximately 0.6% of investment companies and 3% of SEC-registered investment advisers qualify. The Proposal would substantially expand these percentages and require the SEC to conduct more meaningful regulatory flexibility analyses in future rulemakings.

Key Changes

Investment Companies
Under the current framework, an investment company qualifies as a small entity if it, together with other funds in the same group of related investment companies, has net assets of $50 million or less. The Proposal would:

• increase the net asset threshold from $50 million to $10 billion; and
• replace the group of related investment companies concept with a family of investment companies, as defined in Item B.5 of Form N-CEN.¹

If adopted, approximately 80% of fund families would qualify as small entities, representing about 23% of individual funds and 2% of total industry assets. 

Investment Advisers
Under current rules, an investment adviser qualifies as a small entity if it has less than $25 million in regulatory assets under management, less than $5 million in total assets and is not in a control relationship with a larger adviser or entity exceeding those thresholds. The Proposal would:

• increase the regulatory assets under management threshold from $25 million to $1 billion;
• conform the control relationship test to the revised $1 billion threshold; and
• retain the $5 million total assets threshold.

If adopted, approximately 70% of investment advisers would qualify as small entities, although those advisers collectively manage less than 3% of total industry regulatory assets under management.

Automatic Inflation Adjustments
The Proposal would establish an automatic inflation adjustment mechanism under which the SEC would issue an order every ten years adjusting the asset-based thresholds using the Personal Consumption Expenditures Chain-Type Price Index. 

Form ADV Amendments
The Proposal also includes conforming amendments to Form ADV. A registered investment adviser with less than $25 million in regulatory assets under management is currently required to respond to additional questions intended to determine whether the adviser is a “small entity.” The Proposal would increase the threshold to $1 billion, requiring approximately 10,000 additional advisers to complete these questions.

Key Takeaways
The Proposal would represent the first significant revision to the SEC’s small entity definitions since 1998. If adopted, it would materially affect how the SEC evaluates the economic impact of future rulemakings on funds and advisers. The expanded definitions may bring many mid-sized firms within the scope of future regulatory flexibility analyses, potentially affecting how new SEC rules are structured and phased in.
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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 “Family of investment companies” means, except for insurance company separate accounts, any two or more registered investment companies that (i) share the same investment adviser or principal underwriter; and (ii) hold themselves out to investors as related companies for purposes of investment and investor services.}