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Definition of Accredited Investor in
United States
(posted March 11,
2011) |
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In
the United States, Rule 501 of Regulation D: Rules Governing the
Limited Offer and Sale of Securities Without Registration
under the Securities Act of 1933 ("Regulation D") sets the
standards for accredited investor status under certain exemptive
provisions for private and other limited offerings under Regulation D.
Rule 215 defines the term “accredited investor” under Section 2(a)(15) of
the Securities Act. Section 2(a)(15) and Rule 215 set the standards
for accredited investor status under Section 4(5) of the Securities Act,
formerly Section 4(6). While Regulation D is frequently relied upon,
exclusive reliance on Section 4(5) is rare.
Note: Section 4(6) of the
Securities Act of 1933 has been renumbered Section 4(5) by Section 944 of
the Dodd-Frank Act.
Rule 215 defines an “accredited investor” as follows:
General Rules and Regulations, Securities Act of 1933
....
§ 230.215 Accredited investor.
The term accredited investor as used in section 2(15)(ii) of the
Securities Act of 1933 (15 U.S.C. 77b(15)(ii)) shall include the following
persons:
(a) Any savings and loan association or other institution specified 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 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 Table I 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 a
savings and loan association, 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;
(b) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(c) 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;
(d) 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;
(e) 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;
(f) 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;
(g) 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 §230.506(b)(2)(ii);
and
(h) Any entity in which all of the equity owners are accredited investors.
[47 FR 11261, Mar. 16, 1982, as amended at 53 FR 7868, Mar. 10, 1988; 54
FR 11372, Mar. 20, 1989]
....
Rule 501 of Regulation D defines an “accredited investor” as follows:
§ 230.501 Definitions and terms used in Regulation D.
As used in Regulation D (§§230.501–230.508), the following terms shall
have the meaning indicated:
(a) Accredited investor. Accredited investor shall mean any person
who comes within any of the following categories, or who the issuer
reasonably believes comes within any of the following categories, at the
time of the sale of the securities to that person:
(1) Any bank as defined in section 3(a)(2) of the 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(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 §230.506(b)(2)(ii);
and
(8) Any entity in which all of the equity owners are accredited investors.
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Dodd-Frank Wall Street Reform and
Consumer Protection Act
Section 413(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank
Act") requires the definitions of “accredited investor” in the
Securities Act of 1933 rules to exclude the value of a person’s primary
residence for purposes of determining whether the person qualifies as an
“accredited investor” on the basis of having a net worth in excess of $1
million. Previously, individuals qualified as accredited investors if they
had a net worth of more than $1 million, including the value of the
primary residence. This change to the net worth calculation of who is an
accredited investor became effective on enactment of the Dodd-Frank Act.
The text of Section 413(a) reads as follows:
"The Commission shall adjust any net worth
standard for an accredited investor, as set forth in the rules of the
Commission under the Securities Act of 1933, so that the individual net
worth of any natural person, or joint net worth with the spouse of that
person, at the time of purchase, is more than $1,000,000 (as such amount
is adjusted periodically by rule of the Commission), excluding the value
of the primary residence of such natural person, except that during the
4-year period that begins on the date of enactment of this Act, any net
worth standard shall be $1,000,000, excluding the value of the primary
residence of such natural person."
The US Securities and Exchange Commission's
Division of Corporation Finance issued the following
interpretation of how to calculate net worth given the changes
resulting from the Dodd Frank Act:
"Question: Under Section 413(a) of the
Dodd-Frank Act, the net worth standard for an accredited investor, as set
forth in Securities Act Rules 215 and 501(a)(5), is adjusted to delete
from the calculation of net worth the “value of the primary residence” of
the investor. How should the “value of the primary residence” be
determined for purposes of calculating an investor’s net worth?
Answer: Section 413(a) of the Dodd-Frank Act does not define the
term “value,” nor does it address the treatment of mortgage and other
indebtedness secured by the residence for purposes of the net worth
calculation. As required by Section 413(a) of the Dodd-Frank Act, the
Commission will issue amendments to its rules to conform them to the
adjustment to the accredited investor net worth standard made by the Act.
However, Section 413(a) provides that the adjustment is effective upon
enactment of the Act. When determining net worth for purposes of
Securities Act Rules 215 and 501(a)(5), the value of the person’s primary
residence must be excluded. Pending implementation of the changes to the
Commission’s rules required by the Act, the related amount of
indebtedness secured by the primary residence up to its fair market value
may also be excluded. Indebtedness secured by the residence in excess of
the value of the home should be considered a liability and deducted from
the investor’s net worth."
The SEC recently has has proposed a number of
amendments to codify the change to the net worth calculation of who is
an accredited investor in Rule 501 of Regulation D, Section 2(a)(15) and
Rule 215. The new rule as proposed is as follows:
"Any natural person whose individual net
worth, or joint net worth with that person’s spouse, at the time of
purchase, exceeds $1,000,000, excluding the value of the primary residence
of such natural person, calculated by subtracting from the estimated fair
market value of the property the amount of debt secured by the property,
up to the estimated fair market value of the property."
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Alixe B. Cormick
Venture Law Corporation
618 - 688 West Hastings Street
Vancouver, B.C.
V6B 1P1
Phone: 604-659-9188
Fax: 604-659-9178
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