Navigating the Labyrinth, Side Quest: What is an accredited investor?

We’re partway through the labyrinth of red tape and regulations when we hit a dead end. Confused, we check our wrist coms for coordinates, but we’re out of range of Mission Control.

A dusty little creature that looks like a snail made out of rock slithers out from under the hedge. “You forgot about accredited investors!” she says.

“What?” I ask, confused.

“You talked about raising money from accredited investors, or non-accredited investors, all over in your last post, but nobody knows what that is!” she says. “You’re not going to get any further until you sort that out.”
“Sorry, my bad,” I mutter as I shrug and turn to you. “At least this one is easy. That time with the Sphinx… Well, you know how it goes with Sphinxes…”

The snail-thing is right, though: if you’re going to be raising money, it’s important to know what an accredited investor is, how accreditation is determined, and who is responsible for that determination.

In the United States, “accredited investor” is a term defined by the SEC in Regulation D (Rule 501, if you care). The point of having this definition is to allow people with a certain amount of income or net worth to invest in higher-risk (and higher-reward) ventures than people with income or net worth below the given point. The current point for an accredited investor is that the person must make $200,000 (or $300,000 combined with their spouse) for the two most recent years, or have a net worth above $1 million excluding the person’s primary residence.

There is no process or agency that gives the accreditation. The burden of determining whether an individual is a qualified accredited investor or not lies on the person who is selling unregistered securities to accredited investors. Therefore, it is vital that if you are fundraising from accredited investors, you include the due diligence of determining that they are in fact what they say they are.

“That makes sense,” you say, and we turn back to the rock-snail creature. It’s gone, and so is the hedge that was blocking our path.

We cheer, and head further in.

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