Chris McCauley, CPA, Esq.
What is an Accredited Investor?
If you've done any work with securities, you might have heard the term "accredited investor" come up once or twice and noticed they receive treatment that's different from the rest of the public, especially when it comes to receiving financial disclosures for investment opportunities.
Why is that?
In the eyes of the Securities and Exchange Commission (SEC), accredited investors do not need as much protection in the securities market. Although this thinking has caused some controversy, accredited investors are seen as financially savvy investors with the resources, knowledge or skill set to understand the securities market.
For that reason, issuers, brokers, financial advisors and fund managers often seek accredited investors, such as professional athletes, celebrities and other high net worth individuals, because when issuing, offering or selling securities they have fewer registration restrictions and disclosure requirements. Fewer restrictions and requirements mean less money going to attorneys and auditors. The SEC defines the following as accredited investors: A. Banking Institution Any national bank, or other banking institution, organized under the laws of any state, U.S. territory, District of Columbia, who business is limited to only banking and supervised by a state or territorial banking commission. B. Savings and Loan Association Any savings and loan association or other financial institution that is regulated by a state or federal authority, acting on its own behalf or for someone else,
C. Broker/Dealer Any broker or dealer that has been registered under the Securities Exchange Act of 1934 [PDF]. A broker/dealer is an intermediary between customers and issuers. Broker/dealers can buy and sell securities for their own accounts too.
D. Investment Company Any investment company registered under the Investment Company Act of 1940 [PDF]. Investment companies are entities that have been designed specifically to be in the business of investing, reinvesting and trading securities. E. Business Development Company Business development companies are entities that raise a fixed amount of money, organize under the laws of one of the states in the U.S. and operate to invest specifically in small to mid-size companies. F. Small Business Investment Company A Small Business Investment Company (SBIC) is an investment vehicle that has been licensed by the Small Business Administration to provide small businesses with capital. G. Governmental Employee Benefit Plan Any employee benefit plan with total assets exceeding $5,000,000 that has been established and maintained by a state, county, city or government agency. H. Employee Benefit Plan Any other employee benefit plan that has been provided for under theEmployee Retirement Income Securities Act of 1974 (ERISA),
i) where investment decisions are made by a bank, savings and loan association, insurance company or registered investment advisor, ii) that has total assets in excess of $5,000,000, or iii) that is a self-directed plan where investment decisions are made solely by persons that are accredited investors.
I. Private Business Development Company An entity similar to a business development company described above but with fewer restrictions on investment securities and the amount of funding for purchasing those securities. J. Nonprofit Organization Any 501(c)(3) organization with total assets in excess of $5,000,000 and not formed for the specific purposes of acquiring the securities being offered. K. Directors, Officers and Partners Any director, officer or general partner of the issuer of the securities being offered or sold, or any director, officer or general partner of a general partner of that issuer. L. Natural Person with Net Worth Greater than $1,000,000 Any natural person (as opposed to a corporate person, such as a company) whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000. To calculate this net worth,
The primary residence must be excluded from assets,
The home loan secured by the primary residence can be excluded up to the fair market value of the primary residence at the time of sale of securities (unless the loan amount at the time the securities are purchased exceeds the amount that was outstanding 60 days before that time, in which case that excess must be included as a liability), and
The amount of the home loan that exceeds the fair market value of the primary residence must be included as a liability.
M. $200,000+/yr Individual Income (or $300,000/yr in Joint Income with Spouse) Any natural person who has an individual income in excess of $200,000 in the last two years prior to the sale of securities or joint income with that person's spouse in excess of $300,000 in the same two-year time periodAND has a reasonable expectation of earning the same amount of income in the current year.
N. Trusts Any trust with assets in excess of $5,000,000 that was not formed for the specific purpose of purchasing securities. The purchase of these securities must also be directed by someone with the knowledge and experience in finance and business to properly evaluate prospective investments for risks. O. Accredited Investor Owned Entity Any entity in which all equity owners are accredited investors.