"Investor Bulletin: Accredited Investors"

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Investor Bulletin: Accredited Investors is a 3-page legal document that was released by the U.S. Securities and Exchange Commission on September 1, 2013 and used nation-wide.

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INVESTOR BULLETIN
Accredited Investors
The SEC’s Office of Investor Education and Advocacy is
Are you an accredited investor?
issuing this Investor Bulletin to educate individual investors
An accredited investor, in the context of a natural person,
about what it means to be an “accredited investor.”
includes anyone who:
What does it mean to be an
earned income that exceeded $200,000 (or $300,000
n
accredited investor?
together with a spouse) in each of the prior two years,
Under the federal securities laws, a company or private
and reasonably expects the same for the
fund may not offer or sell securities unless the transaction
current year, OR
has been registered with the SEC or an exemption from
registration is available. Certain securities offerings that
has a net worth over $1 million, either alone or
n
are exempt from registration may only be offered to, or
together with a spouse (excluding the value of the
purchased by, persons who are accredited investors. One
person’s primary residence).
principal purpose of the accredited investor concept is
to identify persons who can bear the economic risk of
On the income test, the person must satisfy the thresholds
investing in these unregistered securities.
for the three years consistently either alone or with a
spouse, and cannot, for example, satisfy one year based on
Unlike offerings registered with the SEC in which certain
individual income and the next two years based on joint
information is required to be disclosed, companies and
income with a spouse. The only exception is if a person is
private funds, such as a
hedge fund
or venture capital
married within this period, in which case the person may
fund, engaging in these exempt offerings do not have to
satisfy the threshold on the basis of joint income for the
make prescribed disclosures to accredited investors. These
years during which the person was married and on the
offerings, sometimes referred to as private placements,
basis of individual income for the other years.
involve unique risks and you should be aware that you
could lose your entire investment.
In addition, entities such as banks, partnerships,
corporations, nonprofits and trusts may be accredited
The SEC recently adopted rules to permit
general
investors. Of the entities that would be considered
advertising
for certain exempt offerings.
accredited investors and depending on your circumstances,
the following may be relevant to you:
Investor Assistance (800) 732-0330
www.investor.gov
INVESTOR BULLETIN
Accredited Investors
The SEC’s Office of Investor Education and Advocacy is
Are you an accredited investor?
issuing this Investor Bulletin to educate individual investors
An accredited investor, in the context of a natural person,
about what it means to be an “accredited investor.”
includes anyone who:
What does it mean to be an
earned income that exceeded $200,000 (or $300,000
n
accredited investor?
together with a spouse) in each of the prior two years,
Under the federal securities laws, a company or private
and reasonably expects the same for the
fund may not offer or sell securities unless the transaction
current year, OR
has been registered with the SEC or an exemption from
registration is available. Certain securities offerings that
has a net worth over $1 million, either alone or
n
are exempt from registration may only be offered to, or
together with a spouse (excluding the value of the
purchased by, persons who are accredited investors. One
person’s primary residence).
principal purpose of the accredited investor concept is
to identify persons who can bear the economic risk of
On the income test, the person must satisfy the thresholds
investing in these unregistered securities.
for the three years consistently either alone or with a
spouse, and cannot, for example, satisfy one year based on
Unlike offerings registered with the SEC in which certain
individual income and the next two years based on joint
information is required to be disclosed, companies and
income with a spouse. The only exception is if a person is
private funds, such as a
hedge fund
or venture capital
married within this period, in which case the person may
fund, engaging in these exempt offerings do not have to
satisfy the threshold on the basis of joint income for the
make prescribed disclosures to accredited investors. These
years during which the person was married and on the
offerings, sometimes referred to as private placements,
basis of individual income for the other years.
involve unique risks and you should be aware that you
could lose your entire investment.
In addition, entities such as banks, partnerships,
corporations, nonprofits and trusts may be accredited
The SEC recently adopted rules to permit
general
investors. Of the entities that would be considered
advertising
for certain exempt offerings.
accredited investors and depending on your circumstances,
the following may be relevant to you:
Investor Assistance (800) 732-0330
www.investor.gov
any trust, with total assets in excess of $5 million, not
assets and subtracting all your liabilities. The resulting
n
sum is your net worth.
formed to specifically purchase the subject securities,
whose purchase is directed by a sophisticated person, or
The value of your primary residence is not included in
your net worth calculation. In addition, any mortgage
any entity in which all of the equity owners are
n
or other loan on the residence does not count as a liability
accredited investors.
up to the fair market value of the residence. If the loan is
for more than the fair market value of the residence (i.e.,
In this context, a sophisticated person means the person
if your mortgage is underwater), then the loan amount
must have, or the company or private fund offering
that is over the fair market value counts as a liability
the securities reasonably believes that this person has,
under the net worth test.
sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of the
Further, any increase in the loan amount in the 60 days
prospective investment.
prior to your purchase of the securities (even if the loan
amount does not exceed the value of the residence) will
How do I calculate my net worth?
count as a liability as well. The reason for this is to prevent
To qualify as an accredited investor under the net worth
net worth from being artificially inflated through
test, you must have a net worth that exceeds $1 million,
converting home equity into cash or other assets.
either alone or with a spouse. If calculating joint net worth
with a spouse, it is not necessary that property be held
The following table sets forth examples of calculations
jointly. Calculating net worth involves adding up all your
under the net worth test for being an accredited investor:
Jane Doe
John Smith
James Lee
Primary residence (not included except for related liabilities below):
Home value
$
500,000
$
500,000
$
500,000
Mortgage
300,000
200,000
600,000
Home equity line
–
150,000
–
Included assets:
Bank accounts
$
400,000
$
400,000
$
400,000
401(k)/IRA accounts
400,000
400,000
400,000
Other investments
400,000
400,000
400,000
Car
20,000
20,000
20,000
Total included assets
$ 1,220,000
$ 1,220,000
$ 1,220,000
Included liabilities:
Student and car loans
$
100,000
$
100,000
$
100,000
Other liabilities
100,000
100,000
100,000
Portion of mortgage underwater
–
–
100,000
Balance on home equity line (less than 60 days old)
–
100,000
–
Total included liabilities
$ 200,000
$ 300,000
$ 300,000
Net worth
$ 1,020,000
$ 920,000
$ 920,000
Accredited investor
Yes
No
No
Investor Assistance (800) 732-0330
www.investor.gov
2
What if I am no longer an accredited
Additional Information
investor?
The rules defining accredited investor were changed with
For our
Investor Bulletin
about hedge funds, visit
the passage of the Dodd-Frank Act to exclude a primary
sec.gov/investor/alerts/ib_hedgefunds.pdf.
residence from the net worth test. This means that some
investors who were accredited investors prior to July 20,
For our
Investor Alert
about general advertising
2010 are now not accredited investors. For these investors,
for private placements, visit
sec.gov/investor/alerts/
any purchase rights, such as preemptive rights or rights
ia_solicitation.pdf.
of first offer, related to securities that they invested in
as accredited investors prior to July 20, 2010 are grand-
For FINRA’s
BrokerCheck
resource, visit
www.
fathered in, provided that certain conditions are met. This
finra.org/Investors/ToolsCalculators/BrokerCheck/.
means that the investor can still exercise these rights even
though the investor may not meet the current definition
For our
Investment Adviser Public Disclosure
of accredited investor.
(IAPD)
website, visit www.adviserinfo.sec.gov.
For more information about certain exemptions for
private placements, visit sec.gov/answers/regd.htm.
For our “Rule 144: Selling Restricted and Control
Securities,” visit sec.gov/investor/pubs/rule144.htm.
For additional investor educational information, see
the SEC’s website for individual investors, investor.gov.
The Office of Investor Education and Advocacy
has provided this information as a service to
investors. It is neither a legal interpretation nor
a statement of SEC policy. If you have ques-
tions concerning the meaning or application of
a particular law or rule, please consult with an
attorney who specializes in securities law.
SEC Pub. No. 158 (9/13)
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