Accredited investors – you probably have questions outside of just “What is an accredited investor?” In this video, we’re going to go through exactly those questions that I hear most often.
So what are those big questions around accredited investors? It seems straightforward enough, doesn’t it? Let’s go through the basic definition real quick, just so that we have that on the tip of our tongue. So we understand it in all its context. And then we’re gonna go through those four questions.
An accredited investor is typically thought of as an individual who meets either the income test or the net worth test. The income test for accredited investors is anyone who makes over $200,000 for the past two years, expects to make the same amount or more this year, or $300,000 if they’re counting the income from a spouse. The net worth test is $1 million of net wealth, which does not include the equity in the family home. That’s the basic definition of an accredited investor who can invest in a Regulation D 506(c) offering. Obviously, they can invest in a 506(b) offering as well.
Now, what are those four questions? Because I get them all the time.
The first one is: Well, if I’m not an accredited investor, but I’m sponsoring it, how am I supposed to invest? Not to worry, you actually can invest yourself if you are the sponsor of a syndication. Rule 501(a), which is where the Reg D talks about what an accredited investor is, has a specific thing for you. Rule 501(a) subsection four is your grant of being an accredited investor. There it says, “Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer or general partner of any general partner of that issuer is considered an accredited investor.” So if you are not an accredited investor by the definition we talked about earlier, you are an accredited investor if you are the sponsor yourself, or if you’re part of a membership of the sponsor.
The second question I get a lot is: Can an LLC invest? I have a lot of investors who just want to come together and pool money in order to meet my minimums. The answer is yes, most of the time. An LLC can invest. We find this in rule 501(a) subsection eight or nine; they both apply here. Under 501(a)(8), it says any entity in which all of the equity owners are accredited investors. So that’s gonna lead us to our next question in just a minute. But in any of those, any entity where all of those owners are accredited investors, basically, the note to the rule says we can look open up the LLC, look in see who all the members are. And if they all are accredited investors, that’s fine.
Under 501(a)(9), though, there’s another exception. So any entity which is not listed above, in this case in paragraph (a)(8), and if that entity – if that LLC – was not formed for the specific purpose of acquiring just your offering, and they have investments in excess of $5 million, then it can be considered an accredited investor. So if it’s got $5 million that it invests around, and it was not set up just to invest in yours, then it can be considered an accredited investor.
So that other question that I told you we would discuss, which I hear all the time is: Well, how about this? Can I get a bunch of investors together who are accredited and non-accredited? They go into an LLC, and then they invest in my 506(c)? The answer is no. Why? Because they’re not all accredited investors under 501(a)(8). And they also probably don’t have over $5 million of net assets of investments that they’ve invested into. And they were only set up for the purpose of investing in your entity. So under that, no, it’s not likely that you’ll be able to pool everybody. Now, if you’re doing a 506(b) offering, the answer is yes. But we have to count each non-accredited investor against that 35 non-accredited investors in every 90-day period. So it counts against that. So they can form an LLC and invest in a 506(b), but we’re still counting all the non-accredited investors.
The last question is: Well, is there some sort of – I’m a certified financial planner, or my brother-in-law’s a Certified Financial Planner. Can he just invest because of his credentials? He obviously knows what he’s doing. Well, the answer is, sometimes they can. The SEC has come out with rules that govern this. And it’s allowed under 501(a), and what the SEC has said is there are certain licenses that you can have that we will count. So what are those licenses? It’s a Series 7, so general broker-dealer – they can invest in general securities as a broker-dealer. Also, a Series 65, which is an investment advisor representative. And the third is those who have also partaken in and are currently licensed under Series 82. So 82 allows people to sell private securities, like your Regulation D offering. Those people are considered accredited investors just by their license. Now, what’s surprising is that they didn’t give this to a much wider variety of people. But the SEC is very concerned about who they are considering to be non-accredited investors versus accredited investors.
So those are the rules that we live by. My name is Tilden Moschetti. I am a securities attorney for the Moschetti Syndication Law Group. We specialize in just Regulation D offerings and helping syndicators put together those offerings and give them all the tools that they need to not only be successful in putting those together and being compliant with the law, but also consulting with them in whatever they need in order to truly be successful, complete their raises and have a successful syndication or investment fund. If we can help you, I’d be happy to talk with you. Give my office a call, and I’d love to talk with you soon.