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Accredited Investors Must Meet New Rules to Buy Securities Exempt from SEC Registration

Part 11 of a series of posts on the JOBS Act

Under federal securities laws, a company or private fund may not offer or sell investment securities unless the transaction has been registered with the U.S. Securities and Exchange Commission (SEC) or an exemption from registration is available.

Securities offerings that are exempt from registration may only be offered to—or purchased by—persons who are verified by the securities issuer as accredited investors.

Generally speaking, accredited investors are wealthy people who are considered—by virtue of their wealth—to be sophisticated about investing and generally insulated from potential financial ruin because of that wealth.

The SEC has long been a protector of the small investor, seeking to promulgate laws and regulations that are aimed at preventing small investors from being wiped out by unwise investment offerings from bad actors.

Continuing and expanding that protection was part of the JOBS Act adopted in 2012, when provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted in 2010 were incorporated into the new act.

Prior to passage of the Dodd-Frank Act—which was a response to the financial crisis of 2008—an investor could use the value of his/her primary residence to compute the $1 million net worth requirement to be considered an accredited investor.

Under Dodd-Frank, investors can no longer use the value of their primary residence as part of their $1 million net worth to satisfy the accredited investor standard.

Under current SEC rules, an accredited investor is a person—with or without a spouse—who has a net worth of at least $1 million excluding the value of their home.

An accredited investor can also be a person who earned at least $200,000 (or at least $300,000 with their spouse) in each of the two prior years and expects to earn the same in the current year.

The SEC also notes that entities such as banks, partnerships, corporations, nonprofits and trusts may also be considered accredited investors.

The SEC states that trusts with total assets in excess of $5 million and not formed to specifically purchase securities must be led by a “sophisticated” person.

The SEC says “a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investments.”

Other securities purchasers may be considered accredited investors based on their status – such as a registered broker or dealer—or a combination of their status and the amount of their total assets.

But the definition of accredited investor may change again in the future.

Under Dodd-Frank, the SEC is required to periodically undertake a review of the accredited investor definition “to determine whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest and in light of the economy.”

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