Accredited Investor Status In Federal Securities Law

The term “accredited investor” is frequently heard in the field of financial investing. But many investors lack an in-depth understanding of the implications of accredited investor status or how it is acquired, especially investors accustomed to purchasing only assets sold in offerings that are registered with the SEC.

What is an Accredited Investor?

From a practical perspective, an accredited investor is a person to whom companies can sell securities[i] (e.g., stocks or bonds) in an offering that is not registered with the Securities Exchange Commission (SEC). Regulations passed under the Securities Act of 1933 include several definitions specifying how different types of persons can qualify as accredited investors.[ii] By implication, relevant regulations identify all such accredited investors as persons from whom companies may raise capital without first making detailed public disclosures. Essentially, accredited investors are deemed to have sufficient financial sophistication to forego the requirement of certain regulatory disclosures prior to investment.

Why is Accredited Investor Status Important?

Most investment in U.S. companies is raised through the sale of securities to accredited investors in “unregistered” offerings, which term describes offerings of securities that are not registered with the SEC. Registration is a laborious process that requires detailed public disclosures of a company’s business information and plans.

Despite their frequent use, unregistered offerings are unlawful unless they comply with the detailed guidelines of a “registration exemption.” The negative consequences of unlawful securities offerings can be very significant.[iii] Exemptions from registration allow for the lawful sale of securities in “exempt offerings.” The application of a registration exemption is contingent on compliance with detailed regulations and guidelines.[iv] Qualifying for an exempt offering can be difficult but is generally much easier when securities are sold only to accredited investors in “private offerings.” In 2019, according to the SEC, capital raised in exempt offerings accounted for about 70% of all capital raised in the United States and the most frequently used exemptions were those applicable to private offerings.[v] Thus, the most used avenues to raise equity capital in the United States are probably the registration exemptions for private offerings.
Read More