Companies intending to sell a security, such as a share of stock, must register their securities with the Securities and Exchange Commission (SEC). Companies that go public with an offering are required to file an SEC Form S-1 in order to register, unless they use one of the exemptions offered under Regulation D. Below we discuss the standard accredited investor requirements that issuers must verify in order to operate under the popular exemption Reg D, Rule 506(c).
Under Rule 506(c), companies are permitted to solicit the general public for investments and to advertise offerings, as long as every one of their investors are accredited investor and the company takes reasonable steps to verify their accredited status. This accreditation process may include the review of documentation including brokerage and bank statements, tax returns, W-2s, credit reports, etc.
Accredited Investor Requirements
To be considered an accredited investor, you must meet one of the following requirements:
- Have an annual income of $200,000 or more ($300,000 or more for joint investors spouse) for the previous two years with an expectation to earn at least the same amount in the current year, or
- Possess a net worth greater than $1 million, after all liabilities have been disclosed and not including the value of your primary residence, either as an individual or jointly with the spouse
- Have the position of a general partner, executive officer , or director of the securities being offered, or be a general partner of the issuer
Why the Requirements?
The reason for these accredited investor requirements is that the SEC wants to ensure that individuals who invest in unregistered securities have the ability to absorb a potential loss of their investment.
These investment deals are often referred to as “private placements” due to the fact that SEC registration is not required. Thus, companies involved in these deals generally do not provide as much information as a publicly traded company would.
A formal accreditation process does not apply in determining accredited investors. You are considered an accredited investor if you have the income or assets required, and can provide proof if you are asked for it. However, companies are responsible for taking reasonable steps to verifytheir investors’ accredited status under the law.
Considering an investment that requires accredited investor status may only be advisable if your financial status places you well within the definition of accredited investor.
