Accredited Investor Requirements for Crowdfunding Opportunities

by | May 17, 2019 | Money and Finance

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Crowdfunding opportunities exempt from registration with the Securities and Exchange Commission (SEC) under Rule 506(c) of Regulation D are only accessible to accredited investors. These investors may be individuals or entities. The accredited investor requirements are in place because non-registered securities carry additional risk above registered securities due to the lack of public information available with these opportunities.

Companies can issue securities under Regulation D, for example, and bypass the expensive and time-consuming process of an Initial Public Offering (IPO) and SEC registration. Normally, these companies do so under the authority of an exemption that restricts the sale of such securities to accredited investors.

Accredited Investor Requirements
In order to qualify as an accredited investor as an individual, you must fulfill the following requirements:

  • Have earned income greater than $200,000 (if single) or $300,000 (together with the spouse) in each of the last two years. You must also represent that you have an expectation of making the same income or greater in the current year.

OR

  • Possess a net worth greater than $1 million (not including the value of the primary residence).

Entities such as banks, corporations, partnerships, and trusts may qualify as accredited investors if they meet the following requirements:

  • As a trust, the total assets must be greater than $5 million. The trust cannot be created for the specific purpose of purchasing the securities, and the purchase must be directed by a sophisticated person.

OR

  • Any entity in which every one of the equity owners is an accredited investor.

As mentioned, a level of risk is involved in investing in unregistered securities associated with crowdfunding campaigns. Therefore, accredited investor requirements are in place to protect individuals who are not in the financial position to withstand potential economic losses that may bee associated with this type of asset.

Proving Accredited Investor Status
When accepting funds from accredited investors, the SEC requires issuers to conduct reasonable steps to verify investor status. This can be done in multiple ways.

  1. Principles Based Verification
    An issuer can determine the status of an investor by considering:
  • The nature of the purchaser
  • How the investor came to the offering
  • The type and amount of information available about the purchaser
  • The offering terms

While this can be a simple method of verification, it also puts issuers at risk for not conducting reasonable efforts at investor verification. If the SEC takes this view, the offering could be at risk.

  1. Non-Exclusive Safe Harbor Verification
    This method provides certainty of legal compliance. The issuer can verify the status of the investor in one of a few different ways:
  • Verification obtained by licensed third-party or professional
  • Verification of income by reviewing the investor’s U.S. tax returns
  • Verification of the investor’s net worth as evidenced by bank accounts, real estate assets, brokerage statements, and liabilities (through a review of his or her U.S. credit report)

Also, a general partner, executive officer, or director of the issuer is considered an “insider” and an accredited investor.

As you pursue your crowdfunding campaign, having a proper understanding of who is an accredited investor, and the verification requirements as an issuer, can help you avoid any unnecessary and costly mistakes.

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