As defined by U.S. law, an accredited investor is a person or entity that matches specified sophistication or financial criteria, enabling the investor to anticipate or absorb a total loss related to a particular investment.
Accredited Investor Status
An individual is most often considered as having accredited investor status if they meet at least one of the following three qualifications:
1. Earnings – must be greater than $200,000 per year or $300,000 per year combined with a spouse. These earning must have occurred during each of the last two years and be expected to continue this year and beyond.
2. Net worth – must be at least $1 million. The value if the investor’s residence may not be included in the net worth calculation.
3. Insider – executive officers, general partners or both of the issuer.
There are many other categories for entities, but most private entities will qualify on the basis of having assets in excess of $5 million or because of their equity owners are accredited investors.
In general, to be designated as an accredited investor, one generally has to have significant income, significant wealth, significant assets, sophistication, or be a certain type of entity (such as a bank or insurance company).
Inherent Risk for Non-Accredited Investors
Private placements pertain to offerings which are deregulated and where only a portion of the available information can be presented. The risk of these investments is deemed to be significant, and as such, protections are in place for non-accredited investors. Unfortunately, some of the protection takes the form of not allowing non-accredited investors to make investments at all.
Accredited Investors and Rule 506(c)
Rule 506(c) is one of the exemptions that allows only accredited investors to participate. Because Rule 506(c) has the unique benefit of allowing a company to raise company in an unregistered offering and to use general solicitation and advertising to raise that capital, the laws protect non-accredited investors by not allowing them to invest. The power of Rule 506(c) is astounding. While it might seem like missing the non-accredited investor pool is bad, the reality is that non-accredited investors don’t really fund that much capital. Accredited investors, on the other hand, fund over a trillion dollars of capital a year.
Using an accredited investor under Rule 506(c) enables the issuer to solicit fundraising in a public arena which makes hunting for accredited investors pretty easy. The rule allows companies to market their offerings far and wide on various types of platforms both online and through other types of media.
Because Rule 506(c) raises are so easy to conduct, federal laws require the companies relying on Rule 506(c) take reasonable steps to verify the status of potential investors as accredited investors prior to accepting their subscription. There’s are specific rules which govern how this verification should be done. A reliable third-party that offers accredited investor status services can provide you with the key solution that ultimately leads you to receiving the funding you need. Such an investor verification service provider can perform the ‘reasonable steps’ required by U.S. law so that you can lawfully take those investors into your company or project.
You can take the next step to keep your project moving forward by gaining access to a wide variety of accredited investors.
