According to the SEC, accredited investors are those individuals with sufficient financial ability or means to endure investment loss risk or fend for themselves financially in such a manner that they need not be protected by the registration process of the Securities Act. There are several types of individuals and entities that qualify as an accredited investor under Rule 501 of Reg D, and we will focus here on the qualification requirements for two prominent categories of investor – those individuals with high income or high net worth.
Individuals with High Income or Net Worth
Regarding individuals, the qualifications to be an accredited investor based on net worth state that you must have a net worth of at least $1 million, not counting the value of your primary residence. This net worth may be calculated by the sum of all of your assets minus the sum of all of your liabilities. The qualifications to be accredited investor based on income state that you must have a yearly income of at least $200,000 (or $300,000 or more income combined with your spouse) for the previous two years, and also have a reasonable expectation of obtaining at least the same income in the current year.
Officers and Directors
According to Rule 501, executive officers, directors, and general partners of the issuer of the securities being offered or sold, or directors, executive officers, or general partners of a general partner of that issuer are themselves accredited investors by default. These insiders in the company are not considered to need the protections afforded by the official registration process. The thought is that their position gives them access to sufficient information about the issuer and securities offered to make an informed decision.
If you are operating a company and trying to raise money, it is crucial to understand who and what constitutes an accredited investor and how that can affect your ability to raise capital or invest. Rule 506(b) is one of the commonly used exemptions from registration. It enables you to raise funds from unlimited accredited investors and a limited number of non-accredited (but sophisticated) investors.
However, if you add non-accredited investors to the capital raising effort, the disclosure requirements increase. For this reason, the majority of companies raising money under Rule 506(b) restrict their securities offerings to accredited investors exclusively.
The investor is always required to represent that he or she is an accredited investor according to the definition laid out in Rule 501.
If you need to conduct verification of investment capabilities related to accredited investor status, you can use an experienced accredited investor verification service to get the job done efficiently.