Rather than investing in an offering as an individual, it is common for investors to invest through an entity. If you choose to invest as an entity, for instance an LLC, it is important to know the SEC requirements regarding the definition of accredited investor for entities under Rule 501.
Investors commonly prefer to invest with a shield of limited liability as an entity rather than doing so individually. A number of investment opportunities are only available to accredited investors. Therefore, understanding when an entity qualifies as an accredited investor is beneficial to the company raising funds and to the prospective investor.
SEC Rule 501
Per the Securities Act of 1933 and Rule 501 of Regulation D, an entity qualifies as an accredited investor if all of the equity owners of the entity are, in fact, accredited investors. An LLC is considered to meet the SEC accredited requirements as an accredited investor if each of the members of an LLC have a net worth of $1 million (minus your primary residence) have an annual income that was at least $200,000 (or combined $300,000 with your spouse) for the last two years and you expect to exceed that amount again this year.
Additional entities that may qualify as accredited investors include private development companies, trusts, and certain financial institutions.
An Accredited Investor or Not
When a company makes an offer of securities to potential investors it is required to register the offering unless it can take advantage of an exemption from registration. Some of these exemptions require all investors in the offering to be accredited. The SEC accredited investor requirements are in place due to the fact that many high income and high net worth individuals and entities are better able to understand the risk of such an investment or suffer an investment loss
In conclusion, understanding who qualifies as an SEC accredited investor is important in order to ensure your compliance with the regulations for participating in these investments. If you are taking advantage of one of the exemptions available under the law as an investor participating in an offering of a company raising capital – either as an LLC or individual – you must verify your accredited investor status.