- August 1, 2014
- Posted by: John Fischer
- Category: Accredited Investors
What’s the Difference Between a “Qualified” Investor and an “Accredited” Investor
For people to be considered SEC Qualified Investors, they need to meet certain criteria with the SEC. There are two ways to qualify including being an Accredited Investor or a Sophisticated Investor, which is also based on SEC standards. If you are raising money for your private placement, it is important to know the difference in order to stay within compliance. The type of Reg D offering you select should in part be based on the type of investors you are going to work with, and their accreditation status plays a role in that.
Here is what you need to know about SEC Qualified Investors:
Sophisticated Investors are people that have knowledge and experience that pertains to financial or business transactions. Some examples of a sophisticated investor are a banker, CPA, lawyer, business owner, broker, investment advisor, etc. Basically, if they are successful in their current role and seen as a respected advisor of others, they may be considered sophisticated. The goal of this qualification is to identify those that would be able to fully analyze a deal and make an educated decision about whether or not it is a good investment opportunity. They are allowed to invest in Reg D 506b offerings but not allowed to invest in Reg D 506c opportunities.
Sophisticated investors typically make a good income, but not enough to be considered accredited.
They do not have to meet a set income or net worth standard so this qualification is strictly based on knowledge and experience. Many people within the investment community and especially the crowdfunding community would like this to be more of the standard criteria than being an accredited investor because in their opinion knowledge is more important than money.
Accredited Investors, on the other hand, have the ability to invest in all types of private offerings, without restriction. They are the highest level of SEC Qualified Investor and have all of the privileges of such. As a business or broker looking to raise capital, working with Accredited Investors is an ideal way to raise money because you don’t have as many compliance issues to worry about. If someone is accredited, they are allowed to invest, so your job is to document why they are accredited.
In order to meet the standards of becoming SEC Qualified Investors, people primarily need to achieve it through financial criteria. In order to be accredited, this means that they need to make $200,000 a year as an individual for two years or $300,000 combined with a spouse. They can also qualify by having a net worth of $1 million or more, excluding their primary residence. These financial standards have become the rule of thumb when determining if someone is qualified to invest in private offerings and now that Reg D Rule 506c has been created, this standard is a necessity. Businesses with that type of offering are only allowed to work with Accredited Investors.
The SEC has been discussing several changes to their standards. SEC Qualified Investors today, may not be qualified if the changes go through. If you are considering launching a private offering, do so now before the rules change. You can also expedite the process by purchasing an accredited investor list from AccreditedInvestorLeads.com.