In order to invest in a Rule 506(c) offering an individual must attain accredited investor status. Although most individuals do not qualify for this status, the rules governing who does and who does not are relatively clear.
The Term “Accredited Investor”
According to the SEC, to be designated an accredited investor you must fulfill specific conditions, the following are a few examples:
- Have a net worth greater than $1 million USD (individually or jointly with a spouse), not including the equity in your primary residence.
- Have earned a minimum of $200,000 USD (or joint income of $300,000 USD) in each of the previous two years, and expect to maintain the same or greater level of income in the current year.
- Be an executive officer, general partner, director, or other combination thereof for the issuer of security offered.
Primary residences could be used toward net worth calculations for the purpose of determining accredited investor status up until 2010 when in the aftermath of the Great Recession, that option was removed. Currently, a primary residence may not be used to determine net worth, but it may count against it in cases involving an underwater mortgage. In such a case, the excess amount of your loan beyond the value of your home is subtracted from your net worth.
The Significance of Being an Accredited Investor
Achieving accredited investor status is appealing in that it opens the door for new investment opportunities involving asset classes not accessible to non-accredited investors, such as a Rule 506(c) offering and real estate crowdfunding.
According to the SEC, accredited investor status indicates the investor has financial sophistication and sufficient financial resources that do not require the investor to receive the same protections as an unsophisticated investor requires. An accredited investor should have sufficient financial knowledge and capability to absorb any potential losses sustained in a failed investment offering.
The accredited investor definition clearly leaves open the types of investment opportunities mentioned above to wealthy individuals exclusively. However, this privilege also comes with the responsibility to carefully evaluate securities offerings before making an investment.
