Are You an Accredited Investor?
Accredited investors are a unique category of investors who are allowed to invest in certain types of securities that preclude unaccredited investors. The federal government regulates the sale of securities under the Securities Act of 1933. Many people think of “securities” only as stocks, like those included in the Dow Jones Industrial Average or sold on NASDAQ (which is the acronym for “National Association of Securities Dealers Automated Quotations”). However, in addition to shares of stock, the following may also be considered “securities:”
- Any percentage of ownership sold to another person or entity by the issuing company;
- Promissory notes;
- Memberships (such as in an LLC or Partnership);
- Options; and
Any company, including those that are formed under the laws of California, that offers or sells its securities must comply with the Securities Act of 1933 and with the California Corporate Securities Law of 1968 (“CSL”), which regulates offers and sales of securities in California. For general information and FAQs on the CSL read more here.
Accredited Investors: Able to Purchase Securities Exempt from Registration
In general, any securities to be offered or sold must be registered. Registration is a complex and expensive process.
However, some securities are exempt from the registration requirements. The main exemptions under the federal Securities Act of 1933 are governed by what is called Regulation D, which allows securities of limited value to be sold to a limited number of unaccredited investors, however, Regulation D does not place similar limits on the value of securities or the number of securities which may be sold to accredited investors. The ostensible purpose of the “accredited investor concept” is to limit the pool of investors to persons and entities:
- Who can bear the economic risk of investing in these unregistered, exempt securities;
- Who are financially experienced in investing;
- Who are sophisticated in knowledge about investing; and
- Who have a reduced need for the protections provided by mandated disclosures for non-exempt security offerings/sales.
Accredited Investor Requirements
The statutory definition of “accredited investor” can be found here.
The following types of natural persons satisfy the definition of “accredited investors”:
- Certain directors, executive officers, general partners, etc., of the issuing company;
- Certain officers, directors and employees of entities that are “accredited investors”;
- Certain registered brokers, investment advisors and dealers;
- A person who has individual net worth, or joint spousal net worth, that exceeds $1 million at the time of the purchase (excluding the value of the person’s home); and
- A person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
Certain types of business entities are also deemed “accredited investors.” These include banks, credit unions, certain types of private businesses, trusts or charitable organizations with assets exceeding $5 million, certain insurance companies, certain employee benefit plans, and entities consisting only of accredited investor owners. According to reports, only about 3% of individual Americans qualify as accredited investors.
What is a Non-Accredited Investor?
Regulation D allows unregistered securities to be sold to “non-accredited investors,” but only in limited numbers. A non-accredited individual investor is one who does not meet the net worth or income requirements to be deemed an “accredited investor.” An issuing company can receive investments from an unlimited number of accredited investors but only 35 non-accredited investors are allowed to invest money into a certain private placements.
Contact San Diego Corporate Law
For further information on accredited investors and private securities offerings, contact Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has the experience and dedication to provide all the legal services needed for private offerings and private placements, the purchase and sale of a business, and for mergers and acquisitions. Contact Mr. Leonard by email or by calling (858) 483-9200.