Understanding the Accredited Investor Rule 501 of Regulation D

An accredited investor in the United States is an individual or entity that meets specific criteria set by securities regulators under the Securities and Exchange (SEC) Rule 501 of Regulation D, allowing them to participate in unregistered securities unavailable to the general public.

These criteria ensure accredited investors have sufficient financial sophistication and resources to understand and bear the risks of such private placements and similar transactions.

When seeking money for your business, it is necessary only to approach accredited investors because regulations restrict the types of investors allowed to participate in such private placements.

By limiting investments to accredited investors, regulators aim to protect less sophisticated investors from the higher risks associated with certain types of investments, such as private placements or hedge funds.

To qualify as an accredited investor, an individual must typically meet one or more of the following criteria:

• Income Test: The individual must have earned income exceeding a certain threshold (e.g., $200,000 per year for the past two years or $300,000 with a spouse) and expect the same income level in the current year.
• Net Worth Test: The individual must have a net worth exceeding a certain threshold, individually or jointly with their spouse (e.g., $1 million excluding the value of their primary residence).
• Professional Credentials: 
  • Certain individuals with specific professional credentials or designations may qualify as accredited investors. This may include licensed securities professionals holding the general securities representative license (Series 7), the investment advisor representative license (Series 65), or the private securities offerings representative license (Series 82).
  • A person may also be considered an accredited investor if they are a general partner, executive officer, or director for the company issuing unregistered securities.
  • Knowledgeable employees of a private fund also qualify as accredited investors.

In addition to individuals, certain entities such as trusts, corporations, and certain types of partnerships may also qualify as accredited investors if their assets or net worth exceed $5 million.

The minimum financial requirements to be a qualified individual accredited investor are subject to change based on regulations and may vary by jurisdiction. It’s essential to consult legal and financial professionals or refer to the specific regulations in your jurisdiction for accurate and up-to-date information.

As a potential investor in a private placement, a structured product, or a private equity or hedge fund participant, it’s your responsibility to affirm truthfully your status as an accredited investor.  It is not sufficient to simply state you are an accredited investor. You should be prepared to prove it by providing the parties with the transaction documentation to support your claim.  Such documentation would include your federal tax returns for the previous two years, proof of your current income, a financial net worth statement, an accredited investor verification letter from your financial and/or tax advisors or attorney, and any other requested information.  

Similarly, those seeking investment from investors should diligently confirm that the parties they are dealing with are verified accredited investors.