What is an accredited investor and, as a company, why should you care?
An accredited investor is an individual who meets certain financial criteria; specifically, an individual whose annual income is $200,000 (or $300,000 jointly with a spouse) or an individual whose net worth is $1 Million (excluding their primary residence). An accredited investor is deemed “financially sophisticated” and is therefore assumed to be able to “fend” for themselves. The result of this underlying policy is that it is easier for a company to sell securities to an accredited investor. In order to explain why, I offer the following brief summary of the securities laws.
As you may know, any sale of securities involving a public offering must be done pursuant to a registration statement with the Securities and Exchange Commission. This is a costly, time consuming process (it is also often called an initial public offering or “IPO”). Conversely, an offering of securities that is not a “public offering” does not need to be registered. This is often called a private placement. In order to help a company navigate these stormy waters, the SEC promulgated Regulation D. Regulation D states that if a company complies with its provisions, it has not engaged in a public offering. There are three separate provisions of Regulation D that a company may comply with, Rule 504, 505 & 506.
Pursuant to Regulation D, when selling securities to a non-accredited investor, a company is required to provide certain information. As a protection to the non-accredited investor, Regulation D’s information requirement is significant. To the contrary, an accredited investor is assumed to understand both complexities of the transaction and the risk involved. Thus, when a company is selling securities to an accredited investor, it is not subject to the same burdensome information requirement.
Moisan Legal P.C. is a boutique law firm focusing on representing entrepreneurs and businesses in a variety of legal issues. Matthew J. Moisan can be reached at 646.741.5222.