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Accredited Investors and Common Securities Exemptions

Published July 2, 2010

An accredited investor is an individual or a financial entity that has been recognized by the Securities and Exchange Commission as being sophisticated enough to handle large investments.  Under Regulation D, investors who are financially sophisticated may have a reduced need for the protection provided by certain government filings.  Rule 501 of Regulation D clearly defines an accredited investor as any one of the following:

  • A bank or savings and loan association or other institution, whether acting in its individual or fiduciary capacity;
  • A registered broker or dealer;
  • An insurance company;
  • An investment company registered under the Investment Company Act of 1940 or a business development company;
  • A Small Business Investment Company licensed by the U.S. Small Business Administration;
  • A private business development company as defined by the Investment Advisers Act of 1940;
  • A charitable organization, corporation, or partnership with assets exceeding $5 million (must not be formed for the specific purpose of acquiring the securities offered);
  • A director, executive officer, or general partner of the company selling the securities;
  • A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  • A natural person who has an income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
  • A trust with assets that exceed $5 million, the purchases of which are made by a sophisticated person and which has not been formed to acquire the securities offered;
  • An entity in which all of the equity owners are accredited investors.

It is also important to understand how accredited investor status relates to the common exemptions from the registration requirements of the existing federal securities laws.  Accredited investors, unlike those who lack accreditation, are regarded as those who are sophisticated enough to handle their own investments and are thus afforded the following exemptions:

Under Rule 504, a business can sell up to $1 million in securities during a 12-month period to an unlimited number of non-accredited investors.  Also, Rule 504 does not require the issuer to provide any specific disclosure to the investors, regardless of whether they are accredited or not.

Under Rule 505, a business is permitted to sell up to $5 million in securities during a 12- month period to an unlimited number of accredited investors and up to 35 non-accredited investors.  It is important to note that the disclosure requirements when selling to non-accredited investors are more difficult to meet and are very similar to the disclosures required in a public offering.  As such, selling to an accredited investor is the option that will require fewer disclosures, and, therefore, may be more desirable.

Under Rule 506, businesses are allowed to raise an unlimited amount of capital through the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors.  In addition to the disclosure requirement of Rule 505, any non-accredited investors are required to have the necessary knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the proposed investment.

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