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The term “accredited investor” is defined in the Securities and Exchange Commission’s Regulation D. It identifies a type of “sophisticated” investor who, theoretically, is less dependent upon certain governmental filings, like a prospectus, for financial protection. Under the definition, the following entities may be considered accredited investor qualifications:

  • Individuals
  • Insurance companies
  • Banks
  • Trusts
  • Employee benefit plans

We have reproduced (see Definition of Accredited Investor) the text of Rule 501 of Regulation D, which gives the overall definition for accredited investors. We’d like to discuss certain of the accredited investor qualifications in detail, as they require some interpretation.

Accredited Investor Qualifications

Accredited investors have access to privately-placed securities – securities not registered with the SEC. To join this illustrious group of investors, you must accomplish at least one of the following:

  1. Have an individual income of at least $200,000 (joint income of at least $300,000) over each of the previous two calendar years. You must also reasonably expect to maintain your income at these levels into the future. You must be a person, not a legal entity.
  2. Scored a net worth of at least $1 million. The net worth requirement can be met as an individual or in conjunction with your spouse. You may include in your net worth these assets (at market value, less any loans used to secure the asset):
    1. Equity in real estate, personal property
    2. Cash
    3. Short-term investments
    4. Securities
  3. Work for the issuer of the private security being offered in the capacity of a general partner, executive officer, director, or some combination thereof.
  4. You are a corporation, partnership, employee benefit plan or a trust having assets exceeding $5 million.
  5. Trusts can be revocable or irrevocable.
    1. A revocable trust is accredited if each of its grantors is an accredited investor.
    2. An irrevocable trust is accredited if it meets the $5 million asset threshold, is managed by a competent director, and was not formed for the specific purpose of investing in the private placement.
    3. ERISA plans are treated separately.
  6. Retirement plans (IRA, Keogh, personal 401K, etc.) and participant-directed employee benefit plan accounts are accredited if they are owned by an accredited individual.
  7. For ERISA Plans other than those that are participant-directed:
    1. Assets must exceed $5 million, or
    2. The plan has an investment manager that is a bank, savings and loan association, insurance company or a registered investment adviser.
  8. Government benefit plans qualify if they have $5 million in assets and are maintained by some state or municipal governmental entity.
  9. Non-Profit entities with $5 million in assets, as indicated on the most recent audited financial statements.
  10. Other institution investors that qualify as accredited investors include:
    1. Banks and savings & loans
    2. Broker-dealers
    3. Insurance companies
    4. Business development companies
    5. Small business investment company
    6. Private business development company

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