An accredited investor qualifies for the 506C SEC regulations for investment offerings, which are typically the favored option for syndication operators for various reasons.
Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that:
all purchasers in the offering are accredited investors
the issuer takes reasonable steps to verify purchasers’ accredited investor status and
certain other conditions in Regulation D are satisfied
Purchasers in a Rule 506(c) offering receive “restricted securities.” A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have authority to require notice filings and collect state fees.
Benefits Of 506(C) Offerings In General
The new Rule 506(c) gives businesses greater flexibility in raising capital by permitting businesses to publicly advertise an offering to a large number of people in a very cost-effective manner. For example:
Under Rule 506(c), businesses are permitted to use social media, and use other advertising and soliciting techniques to solicit investments from large numbers of investors to raise money so long as the business does not commit fraud in doing so and limits investors to “accredited investors”.
Businesses also have greater freedom in making disclosures to investors, provided that the disclosures do not contain false or misleading information.
One of the few limitations to 506(c) offerings is that the business may only sell to accredited investors for whom the business has taken reasonable steps to verify their accredited status prior to sale. A new business can use a third party service to verify the status of investors, or the business can perform this work on its own.
KEY TAKEAWAYS
Accredited investors are those individuals classified by the SEC as qualified to invest in complex or sophisticated types of securities.
To become accredited certain criteria must be met, such as having an average yearly income over $200,000 or working in the financial industry.
Sellers of unregistered securities are only allowed to sell to accredited investors, who are deemed financially sophisticated enough to bear the risks.
Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience.
Unregistered securities are considered inherently riskier because they lack the normal disclosures that come with SEC registration.
Requirements for Accredited Investors
The regulations for accredited investors vary from one jurisdiction to the other and are often defined by a local market regulator or a competent authority. In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D.
To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse.
A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.
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