When it comes to investing in the securities of private or public companies, there are two types of investors: accredited and non-accredited. An accredited investor is an individual or entity that meets certain financial criteria, such as having a net worth of at least $1 million (excluding their primary residence) or an annual income of at least $200,000 ($300,000 for joint income with a spouse) for the past two years and a reasonable expectation of the same income level in the current year. Non-accredited investors are comprised of individuals who do not meet these above criteria.
The Securities and Exchange Commission (“SEC”) provides guidance as to the categories of investors that can qualify as accredited investors, including banks, insurance companies, broker-dealers, and state-registered investment advisers. A plan established and maintained by a state for the benefit of its employees with more than $5 million in assets and employee benefit plans with over $5 million in assets, for which an investment adviser makes investment decisions, may also qualify. Additional qualifying persons or entities include tax-exempt charities with assets exceeding $5 million; directors, executive officers, or general partners of the company selling securities; enterprises in which all equity owners are accredited investors, and some trusts exceeding $5 million in assets. Family offices with assets of more than $5 million under management and “knowledgeable employees” of a private fund, can also qualify as accredited investors. (For more information, please visit https://www.law.cornell.edu/cfr/text/17/230.501).
The SEC regulates all securities offerings that can be sold and requires that all securities be registered with the SEC unless the securities fall into an exemption from registration. The most common exemptions for a private offering involve Rule 506(b) or Rule 506(c) of Regulation D (See DATI Blog – Regulation D: Choosing Between 506(b) or 506(c)). Yet, their rules differ relating to the type of investors that are allowed to participate in each of these offerings.
Rule 506(b), which is the exemption Dot Hip Hop Partners, LLC used, allows companies to raise an unlimited amount of capital from accredited investors and allowing for up to 35 non-accredited investors without having to register the securities offered and sold with the SEC. However, no general solicitation or advertising is permitted to market those securities under the Rule 506(b) exemption. In contrast, Rule 506(c), which is the exemption Digital Asset Monetary Network, Inc., will use, allows companies to raise capital from only accredited investors, through public advertising and general solicitation. However, companies must take reasonable steps to verify that all investors are truly accredited. Unlike Rule 506(b), 506(c) does not permit non-accredited investors to participate in the offering at any level or point in time.
Accredited investors have access to a wider range of investment opportunities, as they are allowed to participate in both Rule 506(b) and Rule 506(c) securities offerings. Non-accredited investors, on the other hand, are only allowed to participate in Rule 506(b) offerings, or other “crowd” related raises, as per the JOBS Act. However, it’s important to note that investing in certain securities may carry significant risks which may involve the loss of all their invested capital. Investors should always conduct due diligence and consult with a securities attorney and/or a financial advisor before investing. Additionally, an investor with accredited status is not obligated to invest in any particular offering. Rather, each investment opportunity should be evaluated on its own merits.
Understanding the differences between accredited and non-accredited investors is important for both issuers and investors of securities. Issuers are required to know which type of investor they are targeting when deciding whether to utilize Rule 506(b) or Rule 506(c) of Regulation D, while investors need to know which types of securities offerings they are eligible to participate in. By knowing your investor classification and risk tolerance level, you may ultimately be making more informed decisions about what investment opportunities are right for you.
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