|Accredited Investors|| |
Accredited means at least meeting or possibly exceeding any of the financial standards that the Securities and Exchange Commission has established under its Regulation D in defining the term accredited as applied to investors in the context of this term and Regulation D under the Securities Act, which provides a safe-harbor exemption for private placements, including some offerings made in whole or in part to accredited investors.
An entity may qualify as an accredited investor if it meets any of the alternatives definitions: a $5 million net worth qualification, alternatively all of the equity owners being accredited investors themselves would make the entity an accredited investor, or banks, insurance companies, other financial institutions and some other specified entities are treated expressly as accredited investors. The situation of individuals and couples is special. If one individual has an income of $200,000 for the prior two calendar years and expects an income of $200,000 for the current calendar year, or if one couple has an income of $300,000 for the prior two calendar years and expects an income of $300,000 for the current calendar year, or if an individual or couple has a minimum net worth ( excluding primary residence equity, if any) of $1 million. In the alternative an individual can be accredited if he or she has a net worth of $1 million or more (excluding net equity in the primary residence). A married couple is an accredited investor if they have a net worth of $1 million or more (excluding any net equity in the primary residence) or a $300,000 combined income per year in the current and two immediately prior years or either of them has an individual income of $200,000 per year in the current and two immediately prior years.
Regulation D under the Securities Act provides a safe-harbor exemption granted by the SEC for private placements. A private offering of securities by a securities issuer can be accomplished without Securities Act registration. The company offering securities is allowed to sell to accredited investors with a minimum of legal difficulties, liabilities and restrictions. A private offering can be accomplished with far less formality and fewer legal strictures than in a public offering that must be registered with the Securities and Exchange Commission. An issuer of securities would seek accredited investors in order to sell them securities. Making matters more risky, an investor in a private offering may have sparse information. Worse still, usually no one provides any guarantees--the issuing company makes no guarantees and a personal guaranty or assurance by a third-party in rarely provided in a private offering. Moreover, an investor in a private offering also receives securities that may not be resold without registration under the Securities Act or the satisfaction of an exemption under Rule 144 that requires the holder to have held the securities for a minimum period of one year before selling (reduced to 6 months if specified information about the securities shall have been made publicly available).
Qualified individuals or entities who meet the tests for being treated as "accredited" are relatively easy and attractive targets to whom to sell securities. Some feel that the issuing company has all of the advantages because an investor will be foregoing protections that are embodied in the Securities Act, protections that would apply in the context of an offering registered with the SEC under the Securities Act. Accredited investors in a private offering need to protect their own interests by asking for information from the securities issuer, or obtaining information independently, to have a solid basis to make informed investment decisions.