You can lie about anything, but you shouldn’t lie. Period.
What is an Accredited Investor?
Under SEC law, a company that offers its own securities must register these investments with the SEC before it can sell them unless it meets an exception. One of those exceptions is selling unregistered investments to accredited investors. As you can see, accredited investors have legal access to invest in products not available to the general public. These securities include the following:
• Hedge funds
• Venture capital funds
• Private equity deals
• Equity crowd-funding
• Angel investing
• Other private placements
So while the ordinary investor may have experience with investing in securities like stocks, bonds and mutual funds, the SEC sees products like hedge funds as entirely different animals. So investors need to demonstrate they can understand the risks involved with these types of investments. However, one common misconception about accredited investors is that they must go through some formal training and testing process before they can be certified as accredited investors. No agency grants accredited investor status. There is no certification exam you must take or a document that solidifies you as an accredited investor. Instead, the firms selling unregistered products engage in their own screening process to verify an individual’s accredited investor status.
Significance of Being an Accredited Investor
So why is it significant for an individual to be an accredited investor? Qualifying as an accredited investor opens up the opportunity to invest in asset classes such as, real estate syndications, real estate crowdfunding, venture capital and hedge funds.The SEC created the above criteria in an effort to protect new or inexperienced investors from buying into high risk projects. Also, there is less risk of an accredited investor having insufficient fund reserves, in the event of a loss.While the above criteria serves to protect non-accredited, or lower net worth investors from potentially losing big on riskier projects, it also excludes them from access to greater opportunities. The idea is, individuals who qualify as accredited investors have more money they can stand to lose on higher risk projects. However, higher risk can also equal higher reward potential.
Accredited vs. Sophisticated Investors
Sophisticated investor requirements, according to the SEC must, “have enough knowledge and experience in business matters to evaluate the risks and merits of an investment.” Sophisticated and accredited investors are often considered interchangeable, however accredited is much more rigid.The SEC ranks an accredited investor higher than a sophisticated investor. Although, the SEC also states that sophisticated persons can lead accredited investors in the case of a trust, bank, non-profit or entity. The term sophisticated is considered more of a grey area than an accredited investor meeting set criteria.
Why does accreditation exist?
The Securities and Exchange Commission (SEC) created this distinction to refer to individuals who are considered “sophisticated investors.” These types of investor may not necessarily require the same protection that smaller or novice investors may need when investing in a project.It was created as a protective measurement to protect the novice investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss.In fact, the SEC uses this label to regulate companies against advertising to or soliciting investments from non-accredited investors. So if you’re a non-accredited investor, you actually shouldn’t even know about some of these offerings. In a sense, this does create a secret society of sorts. For accredited investors, deals get passed around that could be riskier, but they also provide greater opportunities.
Advantages of being accredited
In short, the advantage of being an accredited investor is that you have the opportunity to hear about more deals, get access to them, and ultimately invest in those deals. I’ve mentioned several of these in previous posts, but a few of these unique opportunities may include:
• real estate syndications
• real estate crowdfunding
• angel investing / venture capital
• hedge funds
Now, some will argue that this whole “accredited investor” thing is just another way for the rich to get richer. The government may have actually agreed with that, and so in 2016, they passed Title III of the Jobs Act. This opened up some of the investments to non-accredited investors — under certain conditions.
Who can be an Accredited Investor?
So far, we’ve discussed accredited investor requirements for individuals. However, certain entities can claim accredited investor status as well. The SEC defines accredited investors in Section 501 under Regulation D. The following entities who can meet the requirements outlined in this document can claim accredited investor status.
• Brokerage firms
• Employer-sponsored retirement plans
• Certain trusts
• Registered Investment Advisor (RIA) firms
In certain situations, an individual can gain approval to buy unregistered securities if he or she can prove experience and education in the financial markets, particularly around unregistered securities. To become an accredited investor, you must either have a net worth exceeding $1 million on your own or with a spouse. Or, you must earn an income surpassing $250,000 ($300,000 if combined with a spouse) during the last two years. You must also prove you can maintain this income status for the current year. As an accredited investor, you can invest in hedge funds and other unregistered securities not available to the general public. However, no agency grants you accredited investor status. Firms selling unregistered securities you’re interested in must put you through their own screening process to determine if you’re an accredited investor. Nonetheless, the financial regulations around accredited investor status may soon loosen up.
How to Become an Accredited Investor
In order to become an accredited investor, you must meet certain income or net worth requirements laid out by the Securities and Exchange Commission (SEC). You must also demonstrate to investment firms that you can qualify to invest in certain products. This article will define an accredited investor and explain how to become one. It will also explore what an accredited investor can do and why he or she must follow certain rules. But because accredited investors have exclusive access to complex investments, it always helps to work with a financial advisor.
What do you Need to Become an Accredited Investor?
To claim accredited investor status, you must meet at least one of the following requirements:
• Have a net worth exceeding $1 million individually or combined with a spouse (excluding value of primary residence).
• Have earned income exceeding $200,000 ($300,000 if combined with a spouse) during each of the last two calendar years. The individual must also demonstrate credibility he or she will at least maintain these income thresholds during the current year.
How Do Firms determine if you’re an Accredited Investor?
In 2013, the SEC put out some guidelines to help firms confirm an individual’s accredited investor status. So let’s say you want to invest in an unregistered fund. The firm that manages it may put you through a screening process before it can decide if it can legally let you. It may start with handing you a questionnaire to see if you meet certain qualifications. You can also expect to provide the following for evaluation:
• Financial statements and details of other accounts
• Credit report for confirming net worth
• Tax returns
• W-2 forms and other documents indicating earnings
Accredited Investor Exceptions
As mentioned above, the net worth requirement to claim accredited investor status excludes primary residence. The only exception to this rule applies if you have an underwater mortgage or a home equity line of credit (HELOC). It’s also important to note that the Dodd-Frank Act introduced the primary residence exclusion. The administration of President Donald Trump has been making efforts to undo Dodd-Frank and other financial regulations. So you may soon enjoy looser terms on becoming an accredited investor. But for now, you still have to meet these requirements.
What is a Non-Accredited Investor?
A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors. An accredited investor can be a bank or a company but is mainly used to distinguish individuals who are considered financially knowledgeable enough to look after their own investing activities without SEC protection. The current standard for an individual accredited investor is a net worth of more than $1 million excluding the value of their primary residence or an income of more than $200,000 annually (or $300,000 combined income with a spouse). A non-accredited investor, therefore, is anyone making less than $200,000 annually (less than $300,000 including a spouse) that also has a total net worth of less than $1 million when their primary residence is excluded. Non-accredited investors make up the bulk of investors in the world. When people speak of retail investors, they often mean non-accredited investors. Basically, this term covers everyone that holds less than $1 million in assets, aside from the value they may have in their house, and earns under $200,000, i.e., the vast majority of Americans. Even though those numbers are not as far away as when the definition was set, accredited investors are still in the 95th percentile according to 2015 statistics from the U.S. Census Bureau. The SEC does have the ability to change the definition of accredited investor should inflation and other factors result in too much of the general population meeting the standard.
Non-Accredited Investors and Private Companies
Non-accredited investors are limited in their investment choices for their own safety. After the speculation around the 1929 Crash and the resulting depression, the SEC was created to protect regular people from getting into investments they couldn’t afford or understand. The SEC used acts and regulations to set out what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency. Private funds, private companies, and hedge funds can do things with investor money that mutual funds cannot simply because they deal primarily with accredited investors. The SEC assumes that all parties involved know the risks and rewards involved, so they have a lighter regulatory touch where these funds are concerned.That said, these funds must pay close attention to their compliance and make sure their investor counts stay within the rules because they can lose their regulation status. For some types of private investment, they are only allowed non-accredited investors when they are employees or fit a specific exemption. Other funds and companies can have unrelated non-accredited investors, but they must keep the number below a certain level. This is the case with Regulation D, which keeps the number of non-accredited investors in a private placement below 35.
Repercussions for lying about being an accredited investor
There are serious consequences — but mostly for the company, not for you.
• In most jurisdictions, the disclosure requirements are much more onerous for a company selling equity to non-accredited investors, and if the company falsely believed you were accredited they probably violated these laws. It’s the company’s responsibility to comply, so a false statement from a non-accredited investor does not absolve them of responsibility for these violations of both federal and state or provincial securities laws.
• In many jurisdictions, non-accredited investors are given by law a right of rescission — sometimes in perpetuity. This means that the non-accredited investor has a right to undo the investment transaction and get their money back — maybe years later. This can be disastrous for a company — imagine that the company is struggling and running low on funds, and suddenly an investor demands their money back. If the investor was unaccredited and has a right of rescission by law, the company may have no option but to undo the investment and repay the cash, even if that pushes the company into insolvency.
So the net of all this is that a company would be very unwise to accept an investment from a non-accredited investor (unless that investor falls under some other exemption from securities laws — more or less limited to company insiders themselves and their immediate families).
Free Consultation With Accredited Investor Lawyer
When you need securities law help or assistance with the SEC in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506