The Securities and Exchange Commission allows certain securities offered by a company or the transaction in which those securities are sold to be exempt from federal registration requirements. One example is when the company offers or sells its securities only to accredited investors.
But what is an accredited investor?
The SEC has guidelines for who qualifies as an accredited investor, as outlined in Rule 501 of Regulation D of the Securities Act of 1933. But simply put, it is someone who the SEC deems to be financially sophisticated enough to protect their own interests. Entities, including banks, nonprofits and trusts, can also be accredited investors.
When it comes to individuals, the SEC has certain income and net-worth tests that define an accredited investor, which include:
- a director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
- an individual whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000;
- an individual who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with their spouse in excess of $300,000 and has a reasonable expectation of reaching the same income level in the current year.
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, positive equity in a primary residence is no longer included as part of an individual’s net worth.
The full list of entities that are considered accredited investors is as follows:
- a bank, registered broker or dealer, insurance company, registered investment company, business development company or small business investment company;
- an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, so long as the investment decision is made by a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5 million;
- a business in which all the equity partners are accredited investors; or
- a charitable organization, corporation or partnership with assets exceeding $5 million, or a trust with such assets, whose purchases are made by a sophisticated person.
It is worth noting that changes could be coming to the accredited investor standards. In December, the SEC released a staff report, produced as part of a mandatory review under the Dodd-Frank Act, that suggested certain revisions, including alterations to the financial thresholds. For example, the staff said it might make sense to adjust the threshold for individuals to $500,000 for annual income and $2.5 million for net worth.