I recently represented an Indiana biotechnology company in its capital raise/private placement, closing its Series A round in late April. We relied on Regulation D’s Rule 506 exemption for the offering. While my client knew its investor pool was comprised solely of accredited investors, many business owners are unfamiliar with the differences between accredited and non-accredited investors.
From a broad perspective, an “accredited investor” is an investor deemed to have a sufficient level of sophistication, wealth or familiarity with the issuing company such that they are in a better position to assume the risks of investment relative to the average person. Non-accredited investors are all other persons.
Why does any of this matter? The SEC, as well as each state’s Blue Sky Laws, have built in greater protections for non-accredited investors – protections that result is greater disclosure requirements for issuing companies. Many securities lawyers argue that companies should strictly focus their capital raising energy targeting accredited investors. Few could disagree. Quite simply, issuing securities to accredited investors is an easier, and less risky, route to take.
The SEC’s definition of an “accredited investor” is in Rule 501 of Regulation D. The definition is nicely summarized at the SEC’s website, available here, and copied below.
Accredited Investors are:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Accredited investor standards change over time, so be sure to talk with qualified securities counsel about accredited investor standards at the time of your capital raise/private placement.