Corporate Finance & Securities

The Definition of “Accredited Investor” and Why It Matters

The definition of accredited investor is a topic we’ve touched on briefly in several posts throughout the years, but today’s post dives specifically into the definition of “accredited investor” as defined in Rule 501 of Regulation D of the Securities Act of 1933. We’ll also point out why it’s important for you to understand who is considered an accredited investor.

Definition under Rule 501

The SEC states that the definition of accredited investor is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” The definition of accredited investor under Rule 501 includes several types of individuals and...

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Corporate Finance & Securities

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,...

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Corporate Finance & Securities

Income Verification & Deferred Compensation: What’s included in income calculation?

Companies offering securities under new Rule 506(c) (which allows issuers to advertise the securities offering) must take “reasonable steps to verify” that all purchasers are accredited investors. One of the ways an individual qualifies as an accredited investor is by having annual income for the last two years exceeding $200,000 or a joint annual income (with spouse) for the last two years exceeding $300,000, and the individual must have a reasonable expectation that he or she will meet these thresholds in the current year.

Do you include deferred compensation, 401k contributions, and other fringe benefits as income? If you take a look at your W-2’s you’ll see that box 2 “wages, tips, other compensation” does not include some forms of deferred...

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Corporate Finance & Securities

Joint Net Worth Standard for Accredited Investor Verification

Only accredited investors can participate in private placements offered pursuant to the new Rule 506(c) which allows founders to utilize advertisements to solicit investment their company. A potential investor and his or her spouse qualify as accredited investors as defined in Rule 501 of Regulation D if their joint net worth exceeds one million dollars.

The text of the rule states the following individuals qualify as accredited investors:

“Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.”

On the face of it, the language is a bit ambiguous. Does “joint net worth” mean community property–assets that are jointly owned? Or does it mean that the wealth of both spouses can be aggregated for determining whether the...

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