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What is an accredited investor?

Many angel investors are accredited investors. Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term “accredited investor” in Rule 501 of Regulation D as:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a 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 with 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; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
  • In the spring of 2010, many investors have been upset with the potential for a few sections within the Senate bill (Restoring American Financial Stability Act of 2010) to overhaul banking to impact negatively on angel investment, and what constitutes an accredited investor.
  • Section 412 recommends increasing the thresholds for accredited investors and Section 413 puts in a complicated and long process that would probably result in state regulation of Reg D offerings, likely leading to greater difficulty in syndicating deals across state lines.

Numerous private investment parties are lobbying Congress to take out the offending sections, although it remains to be seen whether there’s enough support for it to be approved.