In the U.S., the Securities and Exchange Commission (SEC) under Regulation D refers to an accredited investor as a registered broker, investment advisor, business entity or a person who financially knowledgeable and enjoys reduced requirements by the regulatory disclosure filings. The accredited investors include HNWI (high net worth individuals), banks, trusts, insurance companies and brokerages.
For an individual to be an accredited investor, they must report an annual income exceeding $200,000 ($300,000 for joint income) for the previous two years with a projected earning of the same or a higher income in the current year. The threshold for the last two years must reflect the income of an individual either alone or with a spouse. This requirement cannot be met in the income test by the discrepancy of showing one year for an individual income and subsequent two years of a joint income with a spouse.
A person can also be considered an accredited investor if they have a net worth exceeding $1 million individually or with a spouse. The other conditions by the SEC for individual’s accreditation is if they a director, executive officer or general partner for the business entity which is issuing the unregistered securities.
For an entity, the conditions for being accredited if it is a private business development company or an organization whose assets exceed $5 million. However, if an entity has owners who are accredited investors, the entity qualifies to be an accredited investor, but an organization cannot be formed solely for the purchasing some securities.
REGULATION D, RULE 506 (C)
Security and Exchange Commission (SEC) established Regulation D in the 1980’s for the purpose of outlining a way of offering Securities privately. Over the last couple of years, the commission has undergone several changes as a result of the 2012 Jumpstart Our Business Startups Act. This act commonly known as the JOBS Act, was meant to help smaller companies in accessing capital formation by removing the barriers. They would do this by easily attracting investors through the introduction of Rule 506 (c) and by the regulation of the equity crowd-funding.
Under Reg. D, companies can sell preferred equity without being registered with the SEC. There are varied exemptions used by companies to offer investments to the general public such as Rule 506 (c). The only conditions to this are:
However, the investors do not have a limit to the investment.
Every capital raise does not necessitate a PPM. While Reg. D Rule 506 works with the antifraud provision of the laws of the federal security to dictate that accurate and honest information must be availed by the issuers to the accredited investors, there is no condition that this information has to necessarily be specific in nature.
SEC Rule 506 (c) could be the most popular Private Placement Reg. because it allowed general solicitations of Private Placements to Accredited Investors for the following reasons:
Comparatively, Rule 506 (b) of Regulation D can be considered a “safe harbor”. The standards that a company rely on to meet the set requirements are relatively objective. To conduct an offering under the Rule 506 (b), companies can raise an unlimited amount of money and can also sell any number of accredited investors. However, there are requirements for offering under the Rule 506 (b) which are:
For the non-accredited investors who are participating in the offering, the company conducting the offering should:
Under Rule 506 (b), the Securities Act requires a federal preemption from registration and qualification though the States still requires notice filings and collects state fees. A company must file a notice with the Commission on Form D at least 15 days after the first securities in the offering sale.
Rule 506 (b) offer purchases “restricted securities”. These offerings are subject to “bad actor” disqualification provisions. The Security Act.