Accredited investors have access to a wider range of investment opportunities under federal securities laws. While there may be more opportunities available to accredited investors, these opportunities can also carry greater financial and legal risks. The law assumes that accredited investors have enough knowledge to protect themselves from these risks. But how does a person or company qualify as an accredited investor? In the United States, the Securities and Exchange Commission operates under the rules of Regulation D, which provides exemptions from securities registration requirements. Businesses and individuals who qualify as “accredited investors” can qualify for a registration exemption under Regulation D. There are two main tests used to prove this accreditation:
Rule 501 of Regulation D sets forth specific income requirements for accredited investors. To qualify, an investor must earn at least $200,000 for the two years prior to the investment, with the expectation of earning the same or more income in the following year. (Couples must earn at least $300,000 annually to qualify.) An individual can not qualify by showing a single year of individual income and two years of joint income as a spouse. These qualifications can become complicated – particularly when a person’s marital status changes over the three-year period – so it is important to consult with a securities lawyer prior to making an investment requiring accreditation.
An investor can also establish accreditation by using assets in lieu of income. A net income of one million dollars (either individually or with a spouse) can qualify a person as an accredited investor. Remember: net income includes a comprehensive survey of all your assets and liabilities. Speak with a lawyer about family support obligations, other investments, business ownership, pending lawsuits and legal claims, and all other financial issues to determine how this will affect your net worth. Errors can result in costly penalties to both businesses that file for Regulation D exemptions and investors who are found to falsify their accreditation status.
Updates To the Legal Definition of Accredited Investors
In August 2020, the SEC adopted amendments to the definition of an accredited investor. These changes were intended to “update and improve” the definition in order to better identify the individuals and businesses that are qualified to participate in the increasingly complicated American private equity market. These changes largely focus on an individual’s knowledge. If a person has financial certifications or is a “knowledgeable employee” of an equity fund, he or she may qualify as an accredited investor without meeting the income or asset requirements. This new regulation has not yet been tested with case law or advisory opinions, so it is important to consult with a securities lawyer before claiming accreditation under the new rule changes.
The Right California Business Lawyers For All Investment Needs
Secured investments are highly regulated by both state and federal law. Be sure to get legal advice in order to protect yourself from the wide range of penalties that can come from inadvertent securities violations. Call (408) 441-7500 to schedule a consultation with one of the experienced California securities lawyers at Structure Law Group.