Overview of ‘Accredited Investor’

After the Securities Act of 1933 was established, companies wishing to sell securities must register with the Securities and Exchange Commission (SEC).  There are certain exemptions to registration, outlined in Regulation D of the Securities Act. Regulation D Rule 506, the most widely used exemption, allows securities to be sold without registering with the SEC, so long as the securities are being purchased by accredited investors.

The definition of an “accredited investor”, as given by Investopedia, is:

…investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings…

Regulation D Rule 501 provides the parameters for accredited investors:

• An individual, or an individual and their spouse, possessing a net worth greater than $1 million at the time of purchase.  The value of their primary residence must be excluded from their total net worth.
• An individual who for the past two years has earned an income greater than $200,000. Or an individual and their spouse who jointly earned greater than $300,000. Individually or jointly, investors must expect the same level of income for the current year.
• Banks, business and small business development companies, insurance companies, or registered investment companies.
• Charitable organizations, corporations, or partnerships which possess assets exceeding $5 million.
• Employee benefit plans which meet the requirements of the Employee Retirement Income Securities Act.  A bank, insurance company, or registered investment advisor (see above) must be making the investment decisions if the plan possesses total assets less than $5 million.
• Directors, executive officers, or general partners of the company selling the securities.
• Trusts with assets in excess of $5 million which were not formed for the purpose of acquiring the offered securities.  A sophisticated person must also be in charge of making those purchases.
• Businesses where all equity owners are accredited investors.

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