By Joshua Bam
This year the Securities and Exchange Commission (SEC) adopted certain amendments to Regulation D (which covers private exempt offerings to investors) which expands the rules on accredited investors, or those who can participate in unregistered offerings.
This expansion should encourage greater small business investment transactions by allowing more investor types to participate in offerings. While the SEC’s amendments were fairly expansive, a few of the most important provisions for exempt offerings are discussed below.
Many times, issuers create exempt offerings only to accredited investors because allowing unaccredited investors imposes additional oversight under the regulations, including the requirement of an audited balance sheet (usually expensive). Under the old rules, accredited investors included individuals that generally:
- have a regular annual income of $200,000 or more; or
- have a regular annual income of $300,000 with spouse; or
- have a net worth of at least $1,000,000, exclusive of personal residence.
This placed the bar for accredited investor status fairly high. Let’s say you are a CPA, you work with major corporations, understand their value, and make $180,000 a year. Under the old requirements, you wouldn’t qualify as an accredited investor unless you could show more than $1,000,000 in net worth without counting your house.
While the accredited investor standard created a class of people who were able to take risks, it didn’t account for the class of people who were able to understand risks and properly evaluate them.
Under the new SEC amendment, the definition of accredited investors has been expanded to also include:
- Professional Certifications, Designations or Credentials – Natural persons holding in good standing one or more professional certifications or designations or other credentials from an accredited educational institution
- Knowledgeable Employees – An executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity or an employee who participates in investment activities for the company
- Spousal Equivalent – This expands the definition of jointly include a spouse to also include those who are cohabiting or other generally occupying a relationship similar to that of spouses.
These amendments were intended to update and improve the definition to identify, more effectively, investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933.
If you’re looking at updating your investor questionnaire or thinking about a private equity raise, let us know, and our team of experts at Gravis Law will be happy to answer your questions and make the process uncomplicated.