In the United States, certain securities offerings that are exempt from registration under the Securities Act of 1933 may only be offered and sold to so-called “accredited investors.”
The definition is a key component of several exemptions such as Rules 506(b) and 506(c) of Regulation D, and plays an important role in other federal and state securities law contexts. Status as an accredited investor is important because these investors may participate in investment opportunities that are generally not available to non-accredited investors, including, among others, offerings by hedge funds, private equity funds, and venture capital funds. Additionally, accredited investors can receive preferential regulatory treatment in other exempt offerings, such as in Regulation A offerings where they are not subject to the investment limitations imposed upon non-accredited investors.
As it relates to an individual investor, an accredited investor is a person who:
- made over $200,000 (or $300,000 with a spouse) in income in each of the prior two years, and expects the same to be true in the current year; or
- has over $1 million in net worth, either alone or with a spouse (excluding the value of the person’s primary residence or any loans secured by the residence (up to the value of the residence)).
Non-natural person “accredited investors” include, with limited exception:
- banks, insurance companies, registered investment companies, business development companies;
- employee benefit plans if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- tax exempt charitable organizations, corporations or partnerships with assets in excess of $5 million;
- directors, executive officers, or general partners of companies selling securities, as it relates to their securities;
- entities in which all the equity owners are accredited investors; and
- trusts with assets of at least $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a financially sophisticated persons.
Recently the SEC adopted revisions to the accredited investor definition that broaden the definition for individual investors to include more objective measures of financial sophistication (i.e., based on criteria beyond income and net worth).
Among other things, the revised accredited investor standards (when effective in aprrox. 60 days!):
- 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. In line with this, the SEC designated holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons;
- 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 (LLCs) with $5 million in assets may be 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;
- add 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 that was not formed for the specific purpose of investing in the securities offered;
- add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.