» Accredited Investor Guidelines
The SEC released an Investor Bulletin on Accredited Investors describing what it means to be one and the risk involved. For companies raising money through private offerings accredited investors are extremely important. They are the investor data base from which you can raise capital. Reg D does allow for some non-accredited investors to participate in a private offering but a company then has to give additional disclosures. When the disclosure requirements go up the process becomes more expensive for the company raising money. With this in mind it is easier and recommended to only work with accredited investors.
Who is an Accredited Investor?
The SEC considers an individual or couple to be an Accredited Investor if they meet the following:
- The investor needs to earn $200,000 a year or $300,000 a year for a couple OR
- Has a net worth of over $1 million alone or with their spouse. The net worth threshold can not include a primary residence.
Can someone be accredited if they just started earning $200,000 a year?
No, the SEC requires the investor to have earned that much money for the previous two years and to expect to make that much in the current year. In other words someone that has gotten a new raise or just graduated from medical school would not be considered accredited until they had a consistent pattern of earning that much money.
WARNING – SEC HIDDEN REQUIREMENT
What most people don’t realize is that the SEC has an unknown requirement on the income calculation. In this scenario an investor would not qualify:
Year One: An investor made $125,000 and his spouse made $175,000 to equal the $300,000 threshold.
Year Two: The investor made $200,000 and his wife made nothing.
Year Three: The investor made $150,000 and his wife made $150,000.
Even though the couple met the income requirements for all three years the SEC would not consider them to be accredited because they used joint income for years one and three and individual income for year two. It needs to be one or the other consistently in order to be an Accredited Investor.
Who else can be an Accredited Investor?
Banks, partnerships, corporations, nonprofits and trusts can be accredited investors under SEC guidelines. Their guidelines state the following:
- any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
- any entity in which all of the equity owners are accredited investors.
How do I calculate net worth?
Your net worth is your assets minus liabilities. On a peace of paper or spreadsheet list the following:
- Cash in bank accounts
- Stocks and bonds
- Retirement accounts
- Any additional property or accounts
Add all of these items together than list…
- Car loan
- Credit card debt
- Student loans
- Any other misc. debt other than your primary residence
Your total assets minus your total liabilities is your net worth. Your primary residence can no longer be calculated into your net worth so the only reason it would be listed is if you owe more on your home than it is worth. In that case it would go on the debt column.
Can I take money from investors that were accredited and now aren’t because of the mortgage rule?
People that were accredited prior to removing the value of their primary residence can invest in things that they are already invested in prior to the rule changing on July 20, 2010. These investments are grandfathered in. Otherwise non-accredited investors can participate in crowdfunding.