The definition of “accredited investor” is at the nexus of the Securities and Exchange Commission’s missions: (1) to protect investors, (2) to maintain fair, orderly, and efficient markets, and (3) to facilitate capital formation. If you’re an accredited investor you have access to private offerings. That enables capital formation. Private offerings are not subject to review by the SEC so they have fewer protections in place for investors.
Lots of arguments around the accredited investor definition are about an investor’s ability to assess risk in making the investment. I’ve long argued that the risk with a private placement is not the risk of loss, but the risk of liquidity. Some private placements are very risky and some are not. All private placements are less liquid than publicly traded securities. How risky is investing in Tesla right now? But you can sell and exit out of your position in minutes. You may not be able to exit from a private placement position for years.
The SEC added a few expansions to the accredited investor definition in 2024 based on understanding risk. If you have a Series 7, Series 65, and Series 82 license you are an “accredited investor.”
The latest tweak is allowing an investor to verify that he or she is an accredited investor based on the amount of the investment. I’m a big fan of this approach. If someone is willing to invest $1million, it’s very reasonable to assume that his or her net worth is more than $1 million and is therefore an accredited investor.
“if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” Securities Act Release No. 9415 (July 10, 2013).
Along with the investment amount prong, the SEC is also looking for written representations, from the purchaser, as to:
- their accreditation (under Rule 501(a)(5) or (a)(6) if they are a natural person, or under Rule 501(a)(3), (7), (8), (9) or (12) if they are a legal entity), and
- the fact that the purchaser’s minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.
This tweak is in the context of 506(c) private placements that allow advertising of the offering, but require verification of investor meeting the “accredited investor” standard. That verification required obtaining much more sensitive information from investors. It raises concerns about the transmission and storage of that sensitive information. Looks like it may not be necessary as long as you are requiring a fair amount of money.
Interestingly, the Latham request letter set the dollar amount at $200,000 for individuals and $1 million for entities. Those amounts are well below the accredited investor net worth standard.
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