Accredited Investor Requirements Protect Privately Held Corporations and Their Investors

If you own a privately held corporation, then your company, unlike a publicly traded company, is not heavily bound by the oversight regulations of the Securities and Exchange Commission (SEC). However, the SEC still makes and enforces rules that govern the sale of a private company’s securities, in order to protect investors and promote orderly and fair financial markets. These rules include accredited investor requirements. The SEC can restrict who is able to invest in your company, and this particular restriction allows only accredited investors to invest in privately held corporations’ offerings.

Startups can be risky undertakings with a considerable chance of failure. Only allowing accredited investors to invest in certain types of risky investments ensures that the investors are able to absorb a loss if it occurs and also have the financial sophistication to understand the type of risks involved.

Accredited Investor Requirements
To be considered an accredited investor, investors must meet the criteria outlined Regulation D, Rule 501(a) of the 1933 Securities Act.

An individual person must meet the income, net worth, or company insider qualifications. The income qualification requires an income exceeding $200,000 per year, or $300,000 per year with a spouse, for the previous two years, and the investor must have the expectation of earning the same income in the current year. The net worth qualification requires a net worth of more than $1 million either individually or with a spouse, not including the value of the primary residence. In addition, an individual who is a company insider such as an executive officer, director, or general partner may qualify as an accredited investor.

In order for an entity to qualify as an accredited investor, it must have assets greater than $5 million, or have all equity owners who are accredited investors themselves; or it must be a qualifying institutional investor such as an investment company, insurance company, private business development company, or bank.

Verifying Accredited Investor Status and Exemptions
When preparing to sell shares in a private company, the issuer needs to arrange the sale so that it fits into an exemption under SEC registration requirements. The steps required to confirm the status of your investors may vary depending on the exemption being used.

Investors, at a minimum, should certify to an issuer that they are accredited investors. This is typically done by the issuer asking the investor to fill out a questionnaire when seeking to participate in the investment.

If the type of exemption used for financing requires additional verification of the status of the investor – for instance, a Rule 506(c) offering in which you can solicit and advertise in offering broadly – more than the completion of a questionnaire will be required. You will also need to obtain supporting documentation to verify their status as an accredited investor. When dealing with accredited investor verification for Rule 506(c), it is advisable to engage a company specializing in this type of verification, to ensure your offering is legally compliant.

Required Government Filings
If you are raising funds through the offering and sale of securities to accredited investors, you likely need to file other paperwork associated with your exemption. This will probably involve the filing of Form D with the SEC, and a review of adherence to state regulations, depending on the state in which the securities offering is made.

As one can see, there are a number of different accredited investor requirements that private company issuers and investors must pay attention to in order to adhere to the requirements of the SEC.

Be the first to like.