230.501 Definition of Accredited Investor as used in Regulation D
A section 501 accredited investor means someone that fits the criteria of Section 501’s definition of “accredited investor.” A legal term of art defined under Regulation D found in Section 5 of the Securities Act of 1933. An “accredited investor” means a person or legal entity with a special status under financial laws, who may to participate in non-registered investments, since being considered an individual with the experience and means to participate in riskier investments and bear any potential losses.
The Securities and Exchange Commission (SEC) concedes companies and private funds the opportunity to not register certain investments as long as the firms sell these assets to accredited investors exclusively.
Who Is an Accredited Investor?
In order to qualify as an accredited investor, a person must meet certain criteria involving his annual income and net worth.
- Annual Income: The investor must have an annual income that exceeds $200,000 or $300,000 for joint incomes, for the last two years. The individual must also expect the same or higher revenue in the current financial year.
- Net worth: The investor must have a net worth of $1 million or higher, either as an individual or jointly if married, at the time of purchase, excluding their primary residence. In the case of an entity, assets must be valued at $5 million or higher or have an owner who is considered an accredited investor.
However, entities formed for the sole purpose of purchasing unregistered securities cannot qualify for accredited investor status.
How do I become an accredited investor?
There’s no formal process of certification offered to prove your accredited investor status. There is no government agency to review an investor’s credentials, and no exam or certification exists stating that a person has become an accredited investor. Instead, it is on the venture capital companies selling the non-registered investments to verify the qualifications of the buyers.
Typically, the investor is required to fill out a questionnaire by the hedge fund that requires details of their annual income and their net worth attaching supporting documents like financial statements, account information and tax return. It is possible some companies require additional information, like letters from financial advisors and attorneys or credit reports.
Why do accredited investors exist?
The Securities and Exchange Commission (SEC) created this distinction to refer to individuals considered “sophisticated investors”, who are not in need of the same levels of financial protections the common investor does.
Allowing only accredited investors to participate in offerings of non-registered securities has the purpose of:
- Regulating companies against advertising to or soliciting investments from non-accredited investors.
- Protecting the regular investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss
- Making sure that those who meet the qualifications have the financial sophistication necessary to evaluate a private investment and potentially riskier opportunity
- Assuring that the risk of losing their investment falls on those who financially prepared to bear the situation.
Amendment to the Accredited Investor Definition
The SEC announced the adoption of amendments to the definition of “accredited investor,”. In efforts to “simplify, harmonize, and improve” the rules governing the private offering of securities while maintaining investor protections by adding new categories of qualifications, including
- Individuals with professional certifications, designations or credentials issued by an accredited educational institution;
- Individuals who are “knowledgeable employees” of private funds;
- Limited liability companies (LLCs) with $5 million in assets;
- Entities, such as Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries, that own investments, in excess of $5 million
- Family offices with at least $5 million in assets under management and their family clients; and
- Spousals may pool their finances for the purpose of qualifying as “spousal equivalent”
Here is the full text of the amendment
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.
include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
clarify that limited liability companies with $5 million in assets qualify as accredited investors, and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
- a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and not formed for the specific purpose of investing in the securities offered;
- “family offices” with at least $5 million in assets under management and their “family clients,” as defined under the Investment Advisers Act; and
- “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendment to Rule 215 replaces the existing definition with a cross-reference to the definition in Rule 501(a).
Conclusion of Reg D Terms
The SEC published these amendments on August 26, 2020. They took effect 60 days after publication in the Federal Register.
If you are interested, here you can find SEC’s official Press release And if you have any questions about how accredited investors work, do not hesitate to contact us
