Under Regulation D Rule 506(c) offerings, one important question that needs to be asked is whether or not the investor is accredited. If so, the investor can enter into such an offer. However, if the prospective investor has failed the accredited investor test, the investor is not accredited and they likely will not be able to participate. These types of offerings are restricted to certain class of investor in terms of their financial capability.
The Income and Net Worth Test
The Securities and Exchange Commission (SEC) outlines definitions of an accredited investor based on income and net worth tests.
To be considered an accredited investor according to an income accredited investor test, an individual must have an income that exceeds $200,000 (or $300,000 with his or her spouse) in the past two years and has reasonable expectation for the same level of income in the current year.
The net worth method of the accredited investor standard demands that the person’s net worth be greater than $1 million (either alone or with a spouse). The person’s primary residence may not be used in the calculation of the net worth.
The SEC offers a table that provides explanation to investors to help them determine if they qualify under the accredited investor requirements.
Possible Changes in the Future
The possibility always exists that additional changes will be added to the accredited investor test and standards. The existing accredited investor rule is subject to the decisions made by U.S. Congress and the Executive branch of the federal government. Previous considerations have revolved around nonfinancial standards for accredited investors as well as other qualifying factors such as professional background and education.
One particular change implemented by the SEC that took place back in 2013 was the removal of the ban on advertising private placements offered to accredited investors. The changes allowed for general solicitation and advertising including through television radio, radio, Internet, social media, print, and seminars.
The Jumpstart Our Business Startups (JOBS) Act has had a significant effect upon the private investment and investor landscape as it relates to the investors access to these particular types of offerings.
