When is an Entity an Accredited Investor?
It is common for investors to invest in startups and other offerings using some form of limited liability entity rather than investing as an individual. When you invest as an entity, e.g. XYZ LLC, it is important to understand the SEC’s definition of accredited investors in order to determine whether your entity is considered an accredited investor under Rule 501. Many investors prefer to invest behind the limited liability shield of an entity rather than investing individually, and many investment opportunities are only available to accredited investors. Knowing when an entity is considered an accredited investor can benefit both the investor and the company raising capital.
SEC Rule 501
Under SEC Rule 501 under Regulation D of the Securities Act of 1933, an entity is considered an accredited investor if all of the equity owners of the entity are accredited investors. This means that if you are the sole member of an LLC, and you are considered an accredited investor—i.e. you have a net worth of $1mm (excluding your primary residence), or consistent annual income of at least $200,000 (or combined income of $300,000 with your spouse)—then your LLC is considered an accredited investor.
Here are a few scenarios:
There are certain other entities that qualify as accredited investors, including certain financial institutions, trusts, and private business development companies. For purposes of this post, we’re discussing only entities that fall outside of those categories.
Why does it matter that your entity is (or isn’t) an accredited investor?
As we’ve discussed previously, when a company offers securities to investors it must register the offering unless it can fall under an exemption from registration. A few of these exemptions require that all of the investors are accredited investors—the rationale being that certain high net-worth and high income individuals and entities are better positioned to absorb the risk and take the plunge into investing in private companies. If you’re investing in a company raising capital under one of these exemptions, you must certify that you are an accredited investor. And if you’re investing as XYZ LLC instead of Joe Schmoe, then the LLC must certify that it is an accredited investor.
If you’re interested in learning more about securities regulations or how to make sure your investors (or you) are accredited investors, please contact us today.