Glossary
Commonly Used Terms Related to Private Placements
Accredited Investor
An individual or entity that meets specific criteria established by the SEC in Rule 501 of Regulation D. These include:For Individuals:
- Income test: Annual income exceeding $200,000 for individuals (or $300,000 combined with spouse or spousal equivalent) in each of the two most recent years, with reasonable expectation of reaching the same level in the current year
- Net worth test: Individual or joint net worth with spouse or spousal equivalent exceeding $1 million, excluding the value of the primary residence
- Professional certification holders: Persons holding certain professional certifications, designations, or credentials in good standing, including Series 7, Series 65, and Series 82 licenses
- Knowledgeable employees: Directors, executive officers, or general partners of the issuer or of a general partner of the issuer
- Private fund investment professionals: "Knowledgeable employees" of a private fund as defined in Investment Company Act Rule 3c-5(a)(4)
- Family clients: Family clients of family offices meeting certain criteria
For Entities:
- Financial institutions: Banks, savings and loan associations, insurance companies, registered investment companies, and business development companies
- Employee benefit plans: With total assets exceeding $5 million, including government employee benefit plans
- Nonprofit organizations: Charitable organizations, corporations, or partnerships with assets exceeding $5 million
- Business entities: Any entity in which all equity owners are accredited investors
- Investment advisers: SEC-registered and state-registered investment advisers
- Rural business investment companies (RBICs)
- Entities owning investments exceeding $5 million that are not formed specifically to acquire the securities being offered
- Family offices with at least $5 million in assets under management and their family clients
- Limited liability companies with assets exceeding $5 million not formed to acquire the securities offered
- Indian tribes, governmental bodies, and funds owning investments exceeding $5 million
- The issuer and its predecessors and affiliated issuers
- Directors, executive officers, and other officers participating in the offering
- General partners and managing members of the issuer
- 20% beneficial owners of the issuer's voting equity securities
- Promoters connected with the issuer
- Investment managers and principals of pooled investment funds
- Persons compensated for soliciting investors (such as placement agents)
- Directors, executive officers, and other officers participating in the solicitation
- Criminal convictions related to securities transactions, false SEC filings, or business conduct
- Court injunctions and restraining orders related to securities activities
- Final orders from specified regulators (including state securities, banking, and insurance regulators) based on fraudulent, manipulative, or deceptive conduct
- SEC disciplinary orders relating to brokers, dealers, and investment advisers
- SEC cease-and-desist orders related to violations of anti-fraud provisions or registration requirements
- Suspension or expulsion from membership in self-regulatory organizations (SROs) like FINRA
- SEC stop orders and orders suspending a Regulation A exemption
- U.S. Postal Service false representation orders
- Reasonable care exception: Available when the issuer can demonstrate it did not know and could not have known about a disqualifying event despite reasonable factual inquiry
- Disclosure exception: For certain Rule 506(b) offerings, disclosure of disqualifying events that occurred before September 23, 2013
- Waiver potential: The SEC may grant waivers upon showing of good cause that disqualification is not necessary under the circumstances
- Be organized in the state where the offering is conducted
- Have its principal place of business in that state
- Meet certain requirements regarding in-state revenues, assets, or use of proceeds
- Sell securities only to residents of that state
- Review of IRS tax forms for the two most recent years (W-2s, 1099s, 1040s, K-1s, etc.)
- Receipt of a written representation from the investor that they reasonably expect to reach the required income level in the current year
- For non-U.S. persons, review of comparable tax documentation from their jurisdiction
- Review of financial statements, bank statements, brokerage statements, tax assessments, and credit reports dated within the prior three months
- Written representation from the investor that all liabilities necessary to calculate net worth have been disclosed
- Confirmation that primary residence value is excluded from the calculation
- For existing investors who previously invested in an issuer's Rule 506(c) offering as an accredited investor, obtaining a written certification at the time of the new sale that the investor continues to qualify
- Nature of the purchaser and type of accredited investor they claim to be
- Amount and nature of the offering (including minimum investment amounts)
- Manner in which the purchaser was solicited
- Terms of the offering, such as a minimum investment amount
- Income Verification: Reviewing IRS forms for the two most recent years and obtaining a written representation about current year expectations
- Net Worth Verification: Reviewing financial documentation dated within the prior three months and obtaining written representation about liabilities
- Professional Verification: Written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that has verified the investor's accredited status within the prior three months
- Existing Investor Verification: For investors who previously invested in an issuer's Rule 506(c) offering as an accredited investor, obtaining written confirmation of continued qualification
- The SEC clarified that the principles-based method allows issuers to use approaches beyond the safe harbors, emphasizing that verification must be "reasonable" under the circumstances
- Issuers may verify accredited status based on a range of information sources beyond tax returns, including reliable third-party databases and public information
- Acknowledgment that the prior three-month timeline for documentation review is not a strict requirement if the information remains reliable
- Issuers may reasonably rely on verification performed by third parties, including other issuers, provided the issuer has a reasonable basis to rely on such third-party verification
- Clarification that the existing investor verification method extends to investors who initially invested under Rule 506(b) offerings, provided the issuer reasonably believes the investor remains accredited
- Emphasized that the assessment of what verification steps are "reasonable" depends on facts and circumstances, including the nature of the investor, the offering, and the issuer's relationship with the investor
- Nature of the purchaser and type of accredited investor they claim to be
- Amount and nature of the offering (including minimum investment amounts)
- Manner in which the purchaser was solicited
- Terms of the offering, such as a high minimum investment amount that only accredited investors could reasonably be expected to meet
- Pre-existing relationship between the issuer and the investor