Capital Management Services Group Offering Advice & Services to Traders | Investors | Funds Accredited Investors Defined
Accredited Investors The SEC issued a Staff Report in December 2015 regarding the definition of an "accredited investor" (as required by law every 4 years). See SEC Staff Report on the Review of the Definition of "Accredited Investor" This report recommends that the definition be revised to allow individuals to qualify as accredited investors based on measure of sophistication beyond the current standards of income and net worth. For example, it suggests that individuals with a threshold level of investments or a professional certification be treated as accredited investors. Read the report as it is rather encouraging! In addition, during 2016 the SEC has expanded on the need for a more relaxed and flexible definition of accredited investor at an industry event in January and an advisory meeting in May. The SEC is accepting comments on the Staff Reporting. Click Here to Comment on the Definition of Accredited Investor
Importance of Accredited Investor StandardThe “accredited investor” definition is a central component of Regulation D. It is intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary. Qualifying as an accredited investor is significant because accredited investors may, under SEC rules, participate in investment opportunities that are generally not available to non-accredited investors, such as investments in private companies and offerings by hedge funds, private equity funds and venture capital funds.
Current LawUnder the accredited investor definition, natural persons are accredited investors if their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year. Natural persons are also accredited investors if their net worth exceeds $1 million (individually or jointly with a spouse) excluding the value of their primary residence. Certain enumerated entities with over $5 million in assets qualify as accredited investors, while others, including regulated entities such as banks and registered investment companies, are not subject to the assets test. Contact Us for Help
Publicly Advertised Fund & Accredited Investor Rule 506(c) Verification Procedures If you are operating under Rule 506(c) of Regulation D (i.e., applicable to advertised U.S. hedge funds) you must request that your investors provide you with a CPA confirmed, licensed attorney confirmed, or SEC registered broker-dealer confirmed accredited investor status statement. Planning Tip: A third party confirmation of an investor's status is a good practice to observe for Rule 506(b) hedge funds in any event. Of course, contact the actual party documenting the confirmation directly to verify that the third party is accredited to avoid fabricated statements). A U.S. hedge fund that does not advertise may have up to 35 non-accredited investors. For more information, read the SEC Staff Report on Accredited Investor Definition Issued December 18, 2015. The definition will continue to evolve over time. Learn More About U.S. Hedge Fund Advertising
Planning Tips for Income Test Though joint spousal income can be used to establish accredited investor status, your investors cannot use separate income for one year and joint income for the next year and future years to meet the test. If the prospective investor has a consistent pattern of income that exceeds $200,000, or $300,000 joint income, the investor's representation is acceptable if you are operating a Rule 506(b) hedge fund (i.e., an unadvertised U.S. hedge fund). Contact Us for Help
Planning Tips for the Net Worth Test The Dodd-Frank Act requires that the value of a person’s primary residence be excluded from the net worth calculation used to determine the person’s accredited investor status. When in doubt of a proposed investor's net worth, the best bet is to request third party confirmation of prospective investor's financial statement of net worth. For more information, read the SEC Staff Report on Accredited Investor Definition Issued December 18, 2015. The definition will continue to evolve over time. Contact Us for Help
Subscription Agreement Description of Accredited Investor The language below is taken from a standard Subscription Agreement used in hedge fund offering documents.
1. Any bank as defined in section 3(a)(2) of the [Securities] Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
2. Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
3. Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
4. 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 a general partner of that issuer;
5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;
6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and
8. Any entity in which all of the equity owners are accredited investors.
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