Accredited Investor Questionnaire

Accredited investor questionnaires are used to determine whether potential investors satisfy the suitability requirements of Regulation D of the Securities Act of 1933. This could eliminate the need for such securities to be registered with the Securities and Exchange Commission.

More importantly, however, is the questionnaire's goal to help verify whether the investor satisfies the requirements for taking part in a private placement under section 4(2) of the Securities Act of 1933, as amended (the Act), as well as under the laws of various US states.

A company relies on the information provided to determine investor suitability for the purpose of offering its securities.

Let's look at the various terms involved and why these questionnaires are so important in collecting and verifying information about potential investors that neither the company nor, if applicable, the placement agent has sufficient knowledge to determine on their own.

Changes to the Definition of "Accredited Investor"

On August 26, 2020, the Securities and Exchange Commission (SEC) finalized changes to the term "accredited investor". The definition was significantly changed for the first time since the 1980s.

In many ways, becoming an accredited investor is a prerequisite for taking part in the private capital markets through a variety of investments. These investments typically include hedge funds, private equity funds, and, most notably, all securities offerings conducted in accordance with the Securities Act of 1933 Rules 506(b) and 506(c).

The accredited investor standard is used in many state registration exemptions as well. According to the final changes, this expanded definition will now include clearly defined categories of people and companies as accredited investors.

What Is an Accredited Investor?

A person or organization that meets certain income and net worth requirements established by the Securities and Exchange Commission is considered an accredited investor (SEC). This designation is critical because only accredited investors can purchase particular securities, such as those offered through hedge funds and private offerings.

According to Regulation D of the Act, a person or entity generally qualifies as an "accredited investor" if they meet the criteria below:

1. A natural person who has a combined net worth with their spouse that is greater than $1,000,000, excluding the value of their primary residence;

2. a natural person who, in each of the two most recent calendar years, had an individual income of more than $200,000 or a joint income with their spouse of more than $300,000 and who rationally anticipates achieving the same level of income in the current year;

3. a trust with $5,000,000 in total assets that was not created with the express purpose of purchasing the Note, and whose purchase is overseen by someone with sufficient knowledge and experience in financial and business matters to assess the benefits and risks of the potential investment;

4. A bank as defined in Section 3(a)(2) of the Act, or a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, acting as an individual or fiduciary;

5. A broker-dealer who has been registered under Section 15 of the Securities Exchange Act of 1934, as amended;

6. An insurance company as detailed in Section 2(13) of the Act;

7. A business development company as defined in Section 2(a) (48) of the 1940 Act or an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); a Small Business Investment Company registered with the Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established and maintained for the benefit of its employees by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions if such plan has total assets in excess of $5,000,000.

8. A Small Business Investment Company that has been licensed by the United States Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;

9. A plan established and maintained for the benefit of its employees by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions if the plan's total assets exceed $5,000,000;

10. An employee benefit plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if:

1) A plan fiduciary, as described in Section 3(21) of ERISA, makes the investment choice. A plan fiduciary can be a bank, savings and loan, insurance provider, registered investment advisor, or

2) The total assets of the employee benefit plan exceed $5,000,000, or

3) The employee benefit plan is a self-directed plan in which investment decisions are made solely by "accredited investors."

11. an organization that develops private businesses as described in Section 202(a)(22) of the Investment Advisors Act of 1940, as amended;

12. An organization described in Section 501(c)(3) of the Internal Revenue Code, such as a corporation, Massachusetts or similar business trust, limited liability company, or a partnership (which may include endowments or foundations), with total assets in excess of $5,000,000; or

13. An organization in which all equity owners fall into one or more of the categories mentioned in points 1 through 12 above.

Accredited Investor Questionnaire

The "Accredited Investor Questionnaire" is a self-certification instrument that a company may use to reasonably confirm that an Investor is an Accredited Investor as defined by Rule 501 of Regulation D to the Securities Act of 1933, as amended.

It is critical to remember that, under Rule 506(c) of Regulation D, vetting of Accredited Investor status extends beyond simply completing an Accredited Investor Questionnaire for a General Solicitation offering.

After meeting one of the financial criteria outlined above, you must complete an accredited investor questionnaire. This questionnaire will inquire about your investment experience and goals.

You must sign a statement acknowledging that you are aware of the risks connected with investing in private companies after completing the accredited investor questionnaire.

Additional Information

● Completed Education

● Investment Experience

● Tax Bracket

● There are no pending lawsuits or judgments against the Investor that would make it difficult for the Investor to make payments on this investment, nor has the Investor filed for bankruptcy or been involved in bankruptcy proceedings;

● The investment is made only for the Investor's account and not for any other person's account; and

● The assets of the Investor do not qualify as plan assets under ERISA.

The Investor also affirms:

They acknowledge receiving and carefully reviewing all of the following documentation by signing this Investor Questionnaire:

1. The Operating Agreement for the Issuer's Company.

2. The Subscription Agreement for the offering.

3. The Private Placement Memorandum for the Offering.

Before putting money down on a private placement or syndication, make sure you understand the requirements and risks.

The Importance and Benefits of Accredited Investors

Accredited investors benefit from a variety of advantages, which is why they are important. Access to private and high-yield investments, as well as the ability to pool resources with like-minded individuals, are among the advantages.

You can better understand the investment landscape in the United States if you understand what accredited investors are and why they matter.

An accredited investor can enter the real estate market by investing in a real estate syndication. Syndications are typically offered by real estate investment fund developers or operators. Investing in a real estate syndication is a relatively simple process that has several advantages.

For instance, an accredited investor can combine funds with others to finance sizable commercial or residential construction projects. Furthermore, an accredited investor frequently has access to more opportunities than the general public.

Common Investments for Accredited Investors

There are benefits to being an accredited investor. One of these advantages is having access to a wider range of investment possibilities, including venture capital, hedge funds, and private placements.

Accredited investors can also tolerate higher levels of risk than the average investor. They can afford to lose some money if the investment doesn't work out because they have a higher net worth.

But greater risk also carries the potential for greater reward. So, if you're an accredited investor looking for a place to put your money, here are a few options:

● Private Placements (syndication/funding of real estate): When a business sells securities to qualified buyers in order to raise money, the transaction is known as a private placement. Usually, investment banks or broker-dealers are used for this.

● Hedge Funds: Accredited investors may also be interested in hedge funds. These are pooled investment vehicles that can hold a variety of assets such as stocks, bonds, and real estate.

● Venture Capital (VC): Another popular investment for accredited investors is venture capital. In exchange for equity, investors provide funding to early-stage companies.

When it comes to investing their money, accredited investors have numerous options. However, keep in mind that all investments involve some level of risk. So, before making any decisions, do your homework.

Verification Process for Accredited Investors

The following are two reliable methods for determining accredited investor status:

● Income Documentation: A number of financial records, including pay stubs, brokerage statements, and tax and IRS forms (W-2s, 1040s, 1099, K1s, etc.), can be used to demonstrate that an accredited investor satisfies the SEC income requirements.

A letter attesting to the investor's accreditation from their accountant, employer, registered investment advisor, or licensed securities broker will also work.

● Provider Services: There are several trustworthy third-party service providers who can confirm on your behalf that an accredited investor satisfies SEC requirements.

For instance, if a prospective investor is hesitant to send personal financial information to an issuer directly, they can send it in confidence to a third party who will send the issuer a letter confirming the status of accredited investors.

What Is the Securities Act of 1933?

The Securities Act of 1933 was the first major federal securities law enacted in the aftermath of the 1929 stock market crash. The Truth in Securities Act, Federal Securities Act, and 1933 Act are additional names for the legislation. On May 27, 1933, it was enacted during the Great Depression.

Prior to the passage of the Securities Act of 1933, state laws governed the offer and sale of securities. The new law preserved state laws while requiring greater disclosure from publicly traded companies on a federal level.

Goals of the 1933 Securities Act

The primary goal of the 1933 Securities Act was to require securities issuers to disclose all material information required for investors to make informed stock investment decisions.

By requiring companies to register with the Securities and Exchange Commission (SEC), the legislation addressed the need for improved disclosure. Registration ensures that companies provide all relevant information to the SEC and potential investors via a prospectus and registration statement.

Better Transparency

The Securities Act of 1933 aimed to improve transparency in stock trading as well. The overarching goal, once again, was to help investors make informed decisions based on real-world data. The act mandated that public companies register with the SEC and submit annual financial statements, increasing transparency.

Companies must provide the SEC with information about their operations, securities they are offering to the public, their corporate management structure, and most recent audited financial statements.

Fraudulent Activities and Misrepresentation

A secondary goal of the legislation was to protect investors from stock market misrepresentation and fraud. The Securities Act holds the underwriter of the securities liable for any misrepresentations in documents.

The law contributes to investor confidence by allowing them to invest with confidence that companies are providing accurate, relevant financial information. If they are victims of securities fraud, investors have the right to sue for damages under the Securities Act of 1933.

The Securities Act of 1933 Registration Procedure

All securities sold in the United States must be registered with the SEC, according to the Securities Act. The act lays out the steps that issuers and underwriters of securities on the stock market must take in order to register their securities.

The securities registration form typically contains the information listed below:

● A description of the business's operational areas

● An explanation of the securities that are being sold

● Details on the securities, if they are not common stock

● Information on the issuing company's management

● Annual financial statements that have been certified by independent external auditors

The Prospectus

A prospectus is one of the documents that issuers must submit. Issuers use this document to promote their securities to potential investors. The registration statement also contains the prospectus.

Once they are submitted to the SEC, the documents are immediately made public. Through the EDGAR system, investors can access them on the SEC's website. The documents can be examined by the SEC to ensure that they adhere to the disclosure requirements.

The Disclosure Requirements

The issuers are required to disclose certain information when registering with the SEC in order to aid prospective investors in their due diligence. Examples of this information include the volume of shares issued to the market, the company's goals, material adjustments to the management structure, and the company's tax status.

Additional information includes lawsuits the business is currently involved in as well as any potential material risks that might affect its capacity to pay investors.

Exemption from Registration Obligations

Some securities offerings are exempt from registration under the Securities Act of 1933. Among these exceptions are the following:

● Intrastate deals

● Offerings in limited quantities

● Municipal, state, and federal government securities (an interesting exemption)

● Offerings to a limited number of people or institutions

Regardless of whether securities are registered, the act makes any fraudulent act in the sale of securities illegal.

Private Placements and Accredited Investors

Raising capital is essential for growing a thriving business. Fundraising often begins with seed money from friends and family for company founders, but as a business grows, they often look elsewhere for extra cash.

An initial public offering, or IPO, may be a significant turning point in the growth of some businesses. This happens when a business gets its shares listed on a public exchange so that anyone can buy and sell them.

However, this is where a private placement can be an appealing option.

What Is a Private Placement?

A private placement is the sale of unregistered securities to a small group of investors. A private placement occurs when a company sells shares of stock or other interests in the company, such as warrants or bonds, in exchange for cash.

Private placements are governed by Regulation D, or Reg D, issued by the United States Securities and Exchange Commission. Companies can issue different amounts of securities under Reg D without registering those securities with the SEC depending on the type of investor they are selling to—accredited or non-accredited investors.

A company may choose to raise capital through a private placement for a variety of reasons. If a company is young, it may not yet meet certain public listing requirements, or it may find it advantageous to remain private.

Furthermore, preparing for an IPO can be costly and time-consuming. This is due to the extensive preparations required to ensure that the company's books and financial reporting adhere to specific standards.

Additionally, being a public company requires extensive ongoing public disclosure. Every quarter, public companies report their earnings as well as other significant news and events.

For instance, there's a good chance the news will mention it when the company's CEO or other executives buy or sell shares.

In contrast, a private placement allows a company to sell shares that are neither publicly traded nor registered with the SEC. This reduces costs and reporting burdens while allowing management to maintain greater control over the company.

Some transactions are restricted to accredited investors under these exemptions. This ensures that all participants are sophisticated individuals, which means they have sufficient business and financial knowledge and experience to properly evaluate the benefits and risks of an investment opportunity and, more importantly, to sustain any losses associated with the risks.

Restrictions on Private Placements

A company may issue up to $1 million in unregistered securities annually to any number and type of investor, or up to $5 million to any number of accredited investors and no more than 35 non-accredited investors, under certain provisions of Reg D, and subject to certain conditions.

Alternatively, a company may raise an unlimited amount of capital under Rule 506 of Regulation D if it sells its securities to any number of accredited investors, but not more than 35 non-accredited investors, who are deemed to have sufficient financial knowledge and experience to evaluate the investment, without engaging in any general solicitation or advertising.

Until 2013, the SEC prohibited companies and brokers from advertising private placements under Rule 506. However, regulations issued that summer in accordance with the Jumpstart Our Business Startups Act, or JOBS Act, allow a company to raise an unlimited amount of money even if it advertises or solicits investors.

However, this is allowed as long as all investors are accredited investors and the company has taken steps to verify their accreditation.

Securities acquired through a private placement are typically "restricted." This means that without registration or an applicable exemption under securities law, investors cannot resell them.

In addition, the company must file a brief notice of the offering with the SEC. However, even after the restricted period expires, investors may still struggle to sell those securities because private placement securities are generally very illiquid.

What Information Must Be Disclosed in a Private Placement?

The disclosure requirements for issuers selling securities in a private placement are typically less stringent than those for issuers selling securities in a public offering.

In short, when disclosing information about a private placement offering, an issuer must follow securities law's antifraud provisions. This is true regardless of who is being sold to. When non-accredited investors are involved, the issuer is required to disclose additional key information, such as financial statements.

As a result, investors may gather additional information beyond what is provided in the offering documents on their own. This will help them make an informed investment decision, but they should be aware that they may be locked into an investment that is difficult to liquidate and may incur high transaction costs.

Conclusion

The SEC requires companies to take several steps to confirm the status of an investor who claims to be accredited. If you are an accredited investor, it may be worthwhile to investigate these unique investment opportunities that can help you quickly build wealth.