The “accredited investor” definition is a central component of Regulation D. It is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” Qualifying as an accredited investor is significant because accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, such as investments in private companies and offerings by hedge funds, private equity funds and venture capital funds. Issuers of unregistered structured finance products and debt securities also may rely on Regulation D. Investors in unregistered offerings can be subject to investment risks not associated with registered offerings because some securities law liability provisions do not apply to private offerings, issuers of unregistered securities generally are not required to provide information comparable to that included in a registration statement and Commission staff does not review any information that may be provided to investors in these offerings.
Regulation D originated as an effort to facilitate capital formation, consistent with the protection of investors, by simplifying and clarifying existing rules and regulations, eliminating unnecessary restrictions those rules and regulations placed on issuers, particularly small businesses, and achieving uniformity between federal and state exemptions. While it is particularly useful for small businesses, issuers of all sizes conduct offerings in reliance on Regulation D, in general, and Rule 506(b) in particular. Under the accredited investor definition, natural persons are accredited investors if their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year. Natural persons are also accredited investors if their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence. Certain enumerated entities with over $5 million in assets qualify as accredited investors, while others, including regulated entities such as banks and registered investment companies, are not subject to the assets test.