Accredited Investor

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as Rule 505 and Rule 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

• a bank, insurance company, registered investment company, business development company, or small business investment company;

• an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

• a charitable organization, corporation, or partnership with assets exceeding $5 million;

• a director, executive officer, or general partner of the company selling the securities;

• a business in which all the equity owners are accredited investors;

• a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

• a natural 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; or

• a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.

See more:

Regulation D

Rule 504

Rule 505

Rule 506

External Links

 SEC definition

Potential rule chages

(to get even more strict)

Proposed New Accredited Investor Class for Hedge Funds

At an open meeting on December 13, 2006, the SEC voted to propose a change to the definition of “accredited investor” that, if adopted, would apply to offers and sales of securities issued by hedge funds and other private investment pools to “accredited natural persons”. The proposal requires “accredited natural person” to be both “accredited investors” under the existing standards and own not less than $2.5 million in investments (as currently defined in the Investment Company Act for purposes of the Section 3(c)(7) exemption) on the date an investment is made. The $2.5 million test will be periodically adjusted for inflation.

The SEC release estimates that the accredited natural person definition, if adopted as proposed, would significantly reduce the number of U.S. households that are eligible to invest in private investment vehicles. By the SEC Staff’s calculation, approximately 8.47% of U.S. households currently qualify for accredited investor status under Regulation D. The Staff estimates that this percentage would drop to approximately 1.3% with respect to investments in private investment vehicles if the accredited natural person standard is adopted.

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