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. It is one of the principal tests for determining who is eligible to participate in private capital markets. 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." Regulation D defines an accredited investor 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 natural 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.
On August 26, 2020, the Securities and Exchange Commission adopted amendments to the “accredited investor” definition. Historically, individual investors who do not meet specific income or net worth tests have been denied the opportunity to invest in the private markets. The amendments update the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets, the SEC said.
The amendments allow the SEC to qualify individuals as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The August 26th amendments were accompanied by an order from the commission recognizing holders in good standing of Series 7, Series 65 and Series 82 licenses as accredited investors. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.
Also See: Commodity Pool Operator; Commodity Trading Advisor