Accredited Investors

Who Are Accredited Investors…Why Do We Need To Know This?

Financial Services Professionals need a working knowledge of who is an “Accredited Investor”. Particularly those who are duly licensed as Fee-Only Financial Planners. Not that fee only planners are the only Financial Services Professionals with high net worth clients and prospects. They tend to handle a large portion of this marketplace.

Non- Accredited Investor
First, let take a look at what is a “Non- Accredited Investor. Simply stated, a non-accredited investor is an individual who does not meet the Securities Exchange Commission -SEC criteria of an accredited investor.

Regulation D states that a non-accredited individual investor is one who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually. If spouse, less than $300,000. The income and net worth numbers are measured in the most recent “last two years”.
Note: Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC.

Accredited Investor...What Does Accredited Investor Mean?
Regulation D states that investors who are financially sophisticated may have a reduced need for the protection provided by certain government filings. In order for an individual to qualify as an accredited investor or qualified purchaser, they must:

1. earn an individual income of more than $200,000 per year, or a joint income of $300,000 with spouse in each of the last two years and expect to reasonably maintain the same level of income.
2. or  have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
3. be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.

Answer this Question: Which of the following are considered to be Reg. D “Accredited Investors”

I. A financial institution
II. A limited partnership formed by 10 investors with capitalization of $ 1,000,000
III. An individual who consistently earns $250,000
IV. A director of the issuer (Company that is issuing the stock) who earns $100,000 per year.

a. I, II, IIII, IV
b. I and II only
c. I, III, and IV
d. III and IV only

The answer is c . Financial Institutions; individuals who earned $200,00 for at least two years and who expect to continue to earn that level of income. Also officers and directors of the issuer are all accredited investors. Note: A limited partnership formed by 10 investors with capitalization of $ 1,000,000 is not a good choice as individuals cannot purposely “group” together to take advantage of the 1,000,000 requirement. The 10 purchasers that are forming the limited partnership are counted as 10 individual investors. This means they are counted as “Non- Accredited Investors” unless individually each has income of $200,000 or a net worth of $1,000,000.

Why Do We Need To Know This?
“Accredited Investor” qualifies a client or prospect to invest in certain types of higher risk investments, limited partnerships, hedge funds, venture capital networks and private placements. When a company raises private equity for an investment, lets say…a new company or a hedge fund. The company or hedge fund is able to receive unlimited investments from accredited investors. On the other hand, Regulation D stipulates that only 35 non-accredited investors are allowed to invest money into a given private placement.

Rule and Capital Limits
Under Regulation D Offerings; the requirements under each of the following rules include the amount of money that can be raised, total number of investors who may purchase stock, and the financial sophistication of the investors.

• Rule 504 - Raise up to $1 million in a 12 month period.
• Rule 505 - Raise up to $5 million in a 12-month period.
• Rule 506 – Raise up to whatever the dollar amount is needed

Rule 504: of Regulation D is considered by many authorities in the private placement world to be the most ideal. For many companies, Rule 504 provides an exemption from the registration requirements of the federal securities laws when they offer and sell up to $1,000,000 of their securities (i.e. stocks) in any 12-month period. Additionally, Rule 504 has no prescribed disclosure requirements and has no limit on the number of purchasers (i.e. investors). Significantly as well, no investor sophistication standards are required, such as the requirements for Rule 505 and Rule 506 where the type of investors is limited to Accredited Investors and 35 non-Accredited Investors.

Rule 505: Raise up to $5 million in a 12-month period. This exemption limits the number of non-accredited investors to 35 but has no investor sophistication standards. Rule 505 requires disclosure similar to that required for Rule 506 offerings, under $7.5 million.
Accredited Investors vs. Non- Accredit Investors: May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
Restrictions? : Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them; and Cannot use general solicitation or advertising to sell the securities

Rule 506: No dollar limit. This exemption does not limit the number of accredited investors. The number of non-accredited investors may not exceed 35.
Accredited Investors vs. Non Accredited Investors: The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchases (Non- Accredited). Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

FINRA Webcast on Private Placements
View this very informative and user-friendly webcast that discusses private and public securities offerings that do not require registration under federal securities laws. It covers what registered representatives should know to comply with related requirements, including rules that govern the resale of these securities, and then reinforces the content with a scenario. FINRA Webcast on Private Placement