An accredited investor is a specific type of investor considered especially knowledgeable or experienced under securities law. The experienced nature of an accredited investor allows a company to sell securities to this investor without first going through many of the complicated registration requirements required of most securities offerings.
Typically, when an entity decides to offer securities to the public, that entity must first register with the Securities and Exchange Commission. Section 12(g) of the Securities Act of 1933 demands that securities issuers dealing in multiple states register when they have over ten million dollars in assets and 500 shareholders. Therefore, these registration requirements apply by default to many public offerings of securities.
Section 4(b) of the Securities Act removes "non-public offerings" from many of the usual registration requirements. In such offerings, typically known as "private placements," the securities are not offered to the public at large, but only to a select group. In deciding whether an offering is public or private, the law will scrutinize the number of people to whom the securities are offered, these offerees' relationships to both each other and the issuing entity, and the size of the offering, among other factors.
Securities Act Exemptions
Securities Act Regulation D, Rules 505 and 506 create two separate exemptions from registration requirements for certain securities offerings. Rule 505 is for sales of up to $5 million of securities with 35 or fewer purchasers, while Rule 506 applies to an unlimited amount of securities to the same number of purchasers. However, this 35-purchaser limit does not include purchasers known as "accredited investors." By having accredited investors, an offering may exceed the 35-purchaser limit and still escape the registration requirements under Rules 505 and 506. However, these rules do have certain limitations; for instance, Rule 505 is unavailable to securities issuers who have previously committed securities law violations, and Rule 506 offerings typically can't utilize any sort of general solicitation of prospective purchasers.
The law assumes that accredited investors are sufficiently sophisticated to be capable of protecting themselves, with no need for many of the complex registration requirements demanded to protect the public at large. Securities Act Regulation D, Rule 501(a) defines requirements for a party to be an accredited investor. Among those parties automatically considered accredited are banks, registered investment companies, any executive or director of the company issuing the securities, individuals with a history of earning a certain amount of income and charitable entities valued at $5 million or more. Rule 501(a) contains an exhaustive list of investors considered accredited.
- "Securities Regulation, Cases and Materials, Eleventh Edition"; Coffee, John C. and Hillary A. Sale; 2009
- Securities and Exchange Commission: Accredited Investors
- Securities and Exchange Commission: Regulation D
- Security Lawyer's Deskbook: Securities Act, Regulation D, Rule 505
- Security Lawyer's Deskbook: Securities Act, Regulation D, Rule 506
- Security Lawyer's Deskbook: Securities Act, Section 4(b)