What is an accredited investor?
An accredited investor is a person or entity that is allowed to invest in private capital markets. This person or entity must meet specific criteria outlined by the U.S. Securities and Exchange Commission (the “SEC”) in order to buy unregistered securities. In essence, the SEC sets forth the requirements to ensure the investor has the ability to fend for themselves due to their financial sophistication.
Why be accredited?
One benefit is that accredited investors can participate in certain securities offerings like private equity, private placements, hedge funds, venture capital, and equity crowdfunding. These types of investments are high risk but can yield high rewards for the investor. Thus, it is possible for accredited investors to increase their wealth and better diversify their portfolio through these private transactions. Moreover, the SEC does not limit the amount of money accredited investors can invest in these companies.
What are the requirements to become an accredited investor?
There is no process with the SEC (or any other governmental agency) to become an accredited investor. The requirements can be found in Rule 501(a) of Regulation D of the Securities Act of 1933.
Anyone who meets just one of the following criteria can be considered an accredited investor:
- An individual with an income exceeding $200,000 or a combined income (spouse or spousal equivalent) exceeding $300,000 in each of the past two years, and reasonably expects to maintain that income;
- An individual with a net worth of over $1 million at the time of the investment, either alone or combined with a spouse or spousal equivalent, (not including primary residence);
- An individual who holds a good standing of at least one professional certificate, designations, or credentials from an educational institution the SEC has determined qualifies a person to be an accredited investor. For example, an individual with Series 7, 65, or 82 licenses may qualify;
- The idea is that the qualifying education and credentials provide proof that the investor is sophisticated and sufficiently knowledgeable to understand the risks.
- Any trust with total assets over $5 million, whose purchase is headed by a sophisticated investor;
- An individual whose total investments are more than $5 million;
- Any entity where all the equity owners are accredited investors.
Is the U.S. accredited investor qualification self-certified?
Yes, but not entirely. The burden of verifying whether an individual qualifies as an accredited investor falls on the company offering the securities. One verification tool issuers use to determine an individual’s status is a questionnaire. Theis questionnaire will likely require the investor to attach supporting documents, such as financial or bank statements. In a Rule 506(c) offering, potential investors are required to verify their accredited investor status by providing the issuer a signed letter attesting that a certified public accountant (“CPA”), attorney or registered investment advisor has reviewed their financial information from the past 90 days and finds the investor accredited. ( If investors are not asked for net worth or income credentials when buying unregistered securities, it is a potential red flag that the investment is a scam.)
Can I lie about being an accredited investor? Who’s going to check me?
No, do not lie. Since 2013, the SEC requires all issuers selling to accredited investors to take steps to verify their status. Though the company has the responsibility of verifying your credentials, this does not mean you will necessarily go scot-free if you lie about your finances. For instance, an investor could falsify their financial statements and get into a deal they were not qualified for. If the deal fails, the investor can be hurt significantly. Furthermore, investors who falsely claim to be accredited and cause damages to the issuer can face serious legal repercussions such as being sued for misrepresentation.
Do foreign investors need to be accredited investors?
No, but issuers will need to comply with Regulation S (“Reg S”) of the Securities Act of 1933 when offering and selling to foreign investors.
In addition to other requirements, a foreign investor must show in writing that they are not a “U.S. person,” they are executing the transaction outside of the U.S. and not on behalf of any U.S. person, and they will not engage in hedging transactions involving the interests if they are not in compliance with the Securities Act.
This blog is available for informational purposes only and does not, and is not intended to, constitute legal advice on any subject matter. By viewing this blog, the reader understands there is no attorney-client relationship established between the reader and Wilson Bradshaw LLP. Readers are urged to consult legal counsel regarding any specific legal questions about a specific situation.
