With the many investment opportunities available to investors via platforms such as AcreTrader’s, it’s important to understand the rules for who is eligible to participate in these types of offerings.

In this blog post we will explore what it means to be an accredited investor and why it matters.

Ever since the term “accredited investor” was first used by the Securities Exchange Commission (SEC), balancing the need for capital of start-up businesses and protecting investors in private offerings has been a great challenge for the SEC and issuers alike.

With a public offering where a registration statement is required to be filed by the SEC, significant disclosures are provided to potential investors about an issuer company’s prospects, officers and directors, audited financial statements, material contracts, business plans, and other pertinent information.

However, with an exempt offering, the information required to be provided to potential investors is not always as comprehensive.

Therefore, the SEC developed the following rules regarding accredited and unaccredited investors in an effort to make sure that the public is not being taken advantage of, and to ensure that investors in these private exempt offerings are sophisticated enough to not only understand the risks they are taking, but also that they will be able to absorb any losses incurred in connection with an investment.

Though there are several private offering exemptions in the US today, here is a summary from the SEC of the current definition of an accredited investor contained in Rule 501(a) of Regulation D.

Rule 501(a) contains different qualification thresholds for natural persons and companies, trusts and other organizations.

An accredited investor, in the context of a natural person, includes anyone who:

* earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR

* has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

There are other categories of accredited investors, including the following, which may be relevant to you:

* any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, OR

* any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

The Nuances of Regulation D: Rule 506(b) and Rule 506(c)

If an investor is considering investing in a private offering, it is important to know what private offering exemption on which the offeror or sponsor is relying and what rules apply to that offering.

The rules and regulations issued by the SEC require that offerings of securities to the public either be registered (e.g., initial public offering) or qualify for an exemption from registration.

Regulation D provides certain private offering exemptions and is often relied upon by crowdfunding issuers of securities who are often raising capital to invest in real estate and startups.

There are nuances regarding the type (accredited vs unaccredited) and number of investors allowed in each of the exemptions contained within Regulation D.

However, two of the most common private offering exemptions used by crowdfunding issuers are Rule 506(b) and 506(c).

There are certainly other exemptions relied upon by issuers in the crowdfunding space, such as Regulation CF and Regulation A+, but those are a topic for another blog post.

We won’t explore the full list of types of accredited investors contained in Rule 501(a) for purposes of this blog post, but if you’d like to know more, you may access the full text of Rule 501(a) of Regulation D here.

AcreTrader presently relies on the exemption in Rule 506(c) of Regulation D for the offerings on our Platform.

Rule 506(c) provides that an issuer may make a general solicitation to potential investors and may sell securities to an unlimited number of investors, so long as they are accredited.

Rule 506(b) allows an issuer to sell securities to no more than 35 unaccredited investors and an unlimited number of accredited investors, but there are additional restrictions placed upon the issuer.

How To Verify Your Accreditation

The SEC requires issuers like AcreTrader to take reasonable steps to verify the accreditation status of an investor.

It’s not enough for an issuer to simply have a potential investor check a box that certifies they are accredited, although that is often part of the initial verification process.

The SEC requirement in Rule 506(c) of reasonable verification is why a potential investor on the AcreTrader Platform will be asked to complete an accredited investor questionnaire and also to submit independent, recent (dated within 90 days of the verification) documentation that he or she is accredited.

AcreTrader relies on a third party, North Capital, to verify accreditation status. We do not receive or retain the information an investor provides to North Capital.

Examples of the type of information that could be provided to show accreditation status may include two years of tax returns or W-2 forms, investment account statements (dated within 90 days), or other documentation such as a letter from the individual’s CPA, investment advisor, or attorney.

For convenience, AcreTrader has provided a form of verification letter on our website that you may download for use with your advisors.

Keep in mind that because verification documents must be current, you may be asked to provide accredited investor verification on future offerings as well.

Please contact us if you have any questions regarding AcreTrader, our offerings or accredited investor status.

Note: The information above is not intended as investment advice. Data referenced herein Securities Exchange Commission, Electronic Code of Federal Regulations, and Company Filings, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.

Elise Alexander

VP & General Counsel

Elise was raised on a farm and cattle ranch in Crawford County, Arkansas. Since 2003 she has served as President of a large family office, managing several companies and serving as legal counsel. From 2003 to 2012 Elise served as VP & General Counsel for T.A.W., Inc., an oilfield services company with $200 million in revenue across multiple states. Prior to T.A.W., Elise worked for several years as an associate at the Orrick firm in Silicon Valley in the corporate division forming and advising startups and public companies regarding securities compliance, mergers & acquisitions, and initial public offerings. Before her time with Orrick, Elise worked as in-house corporate counsel for Varian Associates, Inc. in Palo Alto, California. Elise obtained a B.S. in Political Science from Texas A&M University in 1989 and a J.D. from Pepperdine University School of Law in 1992.