Reg D Accredited Investor

Regulation D: Accredited Investors Only?

Registering with the Securities and Exchange Commission (SEC) often takes a lot of time and money that small businesses cannot afford to lose. Regulation D offers exemptions that let companies sell securities to accredited and non-accredited investors without going through the hassle of SEC registration. Before using Regulation D exemption rules, it is important to understand how they could affect your business.

The Basics of Regulation D

According to the Securities Act of 1933, individuals and businesses that sell securities have to either register with the SEC or meet an exemption. Regulation D outlines three rules that investors can use to avoid registration requirements. This lets qualifying companies sell securities without registering with the SEC. Companies that want to take advantage of Regulation D exemptions, however, must file the appropriate forms to ensure they are following rules and enter their information in the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.

The Three Exemption Rules of Regulation D

Regulation D has three rules that can exempt companies from SEC registration.

Rule 504

Rule 504 is useful for companies that only plan to sell $1,000,000 of securities within a 12-month period. Companies that meet this requirement can have as many investors as they want. They can also pay commissions and resale securities.

Rule 505

Rule 505 is useful for companies that sell $5,000,000 or less within a 12-month period. Companies that choose this exemption may sell securities to no more than 35 non-accredited investors. They can, however, sell to an unlimited number of Reg D accredited investors.

Rule 506

Rule 506 does not enforce financial limitations. Companies can, therefore, sell any amount of securities to investors. Like those using Rule 505 for exemption, companies using Rule 506 can only have up to 35 non-accredited investors. They can have an unlimited number of Regulation D accredited investors.

Rule 506 gives companies a little more responsibility when choosing investors. While they can sell to non-accredited investors, they must make sure that each investor meets a sophistication standard. The individual investor may meet this standard on his or her own, or by working in conjunction with a Purchaser Representative who understands the industry well.

Important Differences Between Reg D Exemption Rules

Financial restrictions are the most obvious differences between these three rules. If a company wants to sell more than $1,000,000 in securities, then it cannot claim the 504 exemption. 504, however, does let the company sell to an unlimited number of accredited investor Regulation D and non-accredited investors. The looser regulation makes sense within the industry because the company is working with relatively small amounts of money.

Rule 505 restricts security sales to $5,000,000 or less. It also prevents companies from using general solicitation and advertising to attract investors.

Rule 506 differentiates itself from 504 and 505 in two important ways. First, it doesn’t restrict the amount of securities that companies can sell. Second, it lets companies use general solicitation and advertising to attract investors. Rule 506 prevented general solicitation until the JOBS Act of 2012. According to Forces writer Cheryl Conner, this change to the Reg D program could add a trillion dollars of new funding to the industry.

Finding and Approaching Investors Without Breaking Reg D Rules

The exemption rule that a company uses can significantly influence how they find and approach investors. Any company that gets an exemption from Rule 504 or 505 will need to find investors privately without using an advertisement or anything that could be construed as general solicitation. That means they cannot advertise in newspapers, billboards, the Internet, or any other public forum.  

Companies that claim an exemption under Rule 506, however, can attract investors via any of these methods.

They can purchase a list of investors; create websites to collect leads; make billboards advertising their investment options; air commercials on TV; or use any number of advertising strategies that might attract more investors.

Once a potential investor contacts the company about buying securities, though, the company must make sure that the investor has a sophisticated understanding of the industry. This creates a kind of self-regulation that makes it harder for unscrupulous companies to take advantage of investors who don’t understand the risks and options when buying securities.

Reg D exemptions are extremely helpful to companies that want to sell securities. The exemption that you take should depend on your business’s specific needs.

What is a Reg D Accredited Investor?

If you are looking to raise money or sell investments, it is important to know what a Reg D Accredited Investor is and how to find them. This is a select group of individuals with a high-income earning and a high net worth. You can’t tell who is accredited simply by looking at them. Rather, there are set guidelines that have been created by the SEC as to who can be considered accredited.

Guidelines for Being a Reg D Accredited Investor

The SEC has created these guidelines, and each investor must pass them continuously in order to be accredited. Just because someone was accredited in the past, does not mean they are today.

1) They have made $200,000 or more as an individual over the past two years and are likely to do so again in the current year, or they make $300,000 a year combined with their spouse and are likely to do so again OR

2) They have a net worth of $1 million or more, excluding their primary residence.

The income calculation is fairly simplistic except for individuals that own a business. Many business owners make this amount of money but by deducting things like depreciation and amortization, their tax returns do not indicate this level of income. The net worth qualification is fairly straightforward with one exception. If someone owes more money than their house is worth, the negative equity needs to be deducted from their total net worth. This does not apply to positive equity.

Becoming Certified as a Reg D Accredited Investor

Most investors self-certify, meaning that they sign a document stating how much they make or what their net worth is and sign it. This works perfectly well when companies are raising money using Reg D Rule 504, 505, or 505b. If, however, the company is raising funds using Reg D Rule 506c, a third party must provide the certification after reviewing financial documents. This can be a member of the company, an attorney, licensed broker-dealer, or CPA.

Why Working with a Reg D Accredited Investor is Smart

These investors are more likely to have disposable income to invest. Their income is high and has been so for a period of time, or they have significant assets already, sometimes both. This makes them the ideal prospect for investing in private placements, starting a brokerage account, buying property, etc.

Finding Investors

If you are looking to work with accredited investors, you will need help finding them. Unlike traditional sales leads, these leads must be qualified and full of people that meet the SEC standards. They are difficult to locate and can take years of networking in order to build a solid lead base. Fortunately, you can purchase a lead list of accredited investors from both www.salesleads.tv and www.accreditedinvestorleads.com. This enables you to spend the majority of your time pitching deals and walking people through closing, rather than wasting time looking for names and phone numbers.