Accredited Investors

Accredited investors are a category of investors with special privileges created as part of the terms of the Securities Act of 1933. The Securities Act of 1933 was part of the New Deal offered up under President Roosevelt, another financial reform bill enacted to help prop up the nation's struggling financial system for the long run and avoid another meltdown like the collapse of 1929. Under the terms of the Securities Act, any company that sells or offers up its securities must first register those securities with the Securities and Exchange Commission (SEC) or find and exercise an exemption from the Act's registration requirements.

Included in the Securities Act of 1933 were a number of such exemptions. For some of these exemptions, namely rules 505 and 506 of Regulation D, a company offering securities may sell them to what the Regulation calls "accredited investors". The term accredited investor is laid out and defined in Rule 501 of Regulation D. There are several different groups and even some individuals who qualify under the terms outlined in Rule 501 [1].

Legal Definition of Accredited Investor

The federal securities laws put into place at the time (Rule 501 of Regulation D) define the term accredited investor by providing a list of examples. They are listed out as follows:

• A bank, insurance provider, business development company, or registered investment company;
• An employee benefit plan, within the meaning of such a plan under the terms and definitions of the Employee Retirement Income Security Act, if a bank, an insurance company, or registered investment advisor makes the decisions regarding investment, or if the plan itself has assets in excess of $5 million;
• A charity, corporation, or partnership whose assets exceed $5 million;
• A director, chief executive officer, or general partner of a company selling the securities;
• A company in which all of the equity owners are accredited investors;
• An individual whose individual net worth (or joint net worth with a spouse if married) exceeds $1 million;
• An individual with income of over $200,000 in each of the past two years or whose joint income with a spouse has exceeded $300,000 for those years and a reasonable expectation of a similar income level going forward; or,
• A trust with assets exceeding $5 million, not one specifically formed to acquire the securities being offered [1].

Examining the Securities and Exchange Commission's base criteria for establishing the definition of an accredited investor, one finds that these criteria effectively prevent most people who are better off avoiding any attempts at investing in securities from trying to do so. Rather than try to navigate the high risk securities market, most investors of the working class are relegated to placing their investment capital in stocks and bonds and similar vehicles.  It's important to choose a financial advisor who is familiar with these legal limitations.

Qualifying as an Accredited Investor

For those of us who have ever been interested in investing in a privately owned company, these regulations and rules may be quite familiar. Basically, for an individual to be considered an accredited investor (also known as a qualified investor) and allowed to dabble in securities, that individual have a net worth in excess of a million dollars or have a steady stream of substantial and predictable income well into the six figures annually. Companies who have a desire to raise capital from individual investors without issuing registered securities must limit their target demographic to this relatively small bloc of people. Most investors across the country fail to qualify on all counts, although there are some who have certainly attained minimum income thresholds.

[1] Retrieved 2010-05-30.

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