Accredited Investor Requirements and Private Securities
If you invest in certain types of investments, such as venture capital, private equity, and hedge funds, you will typically be purchasing private securities not registered with the Securities and Exchange Commission (SEC). These investments are not traded in the public marketplace. Federal law puts restrictions on individuals who can actually buy these private securities. Businesses and private funds are generally only permitted to sell these securities to persons referred to as accredited investors. As such, these investors must meet certain accredited investor requirements in order to participate in the purchasing the securities.
According to the Securities Act of 1933, other than exceptions provided for in the law or those created by the Securities and Exchange Commission, offers and sales of securities must be registered with the SEC. Regulation D provides some important exemptions to the registration requirement.
It is important to become acquainted with accredited investor requirements if you are interested in investing in opportunities involving private companies, a venture capital fund, a private equity fund, managed futures funds, or hedge funds.
The Accredited Investor
Within Regulation D is encompassed the definition of the accredited investor. In fact, the definition of this term refers to individuals or entities who have a particular financial sophistication and ability to endure the losses associated with an investment, and also have the ability to protect themselves in the case of such losses, rendering the protections offered by the Securities Act process not necessary.
The types of accredited investors covered under Regulation D include individuals as well as certain types of entities such as banks, trusts, business development firms, and nonprofit corporations.
The criteria concerning individual accredited investor requirements are as follows:
* Earned income is an individual which is greater than $200,000 in each of the two most recent years, or joint income with a spouse which is greater than $300,000 in each of the two most recent years – there must also be a reasonable expectation of attaining the same level of income in the current year.
* Excluding the value of the primary residence, the individual net worth or joint net worth with a spouse must be a minimum of $1 million.
Trusts as Accredited Investors
Trusts are somewhat misunderstood. Are they an entity? Are they an extension of an individual person? They are a little bit of both, but for accredited investor purposes, it’s best to think of them as their own category. A revocable or irrevocable trust is often utilized by individual investors to hold their investment accounts for purposes of estate planning. Provided that all of a trust’s equity owners are accredited investors themselves, the trust will meet the definition of an accredited investor. Alternatively, most trusts that have over $5m in assets can qualify as accredited investors.