Accredited Investor

Accredited Investor

Accredited Investor Definition

I received an email last Thursday from someone within the Hedge Fund Group (HFG) asking if I had an accredited investor definition post on my blog which lists the items which allow someone to be considered an accredited investor. When I told them that I had not yet, they sent me over what their firm is using so I could share it here. This is not a legal resource to be used to run a hedge fund business but it is a list of ways someone can be considered an "accredited investor." Please let me know if I missed anything here -
An accredited Investor is someone who fits within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the Interests to that person:
  1. Any bank as defined in Section 3(a)(2) of the Securities Act or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;
  2. Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
  3. Any organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
  4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
  5. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
  6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
  7. Any trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the Securities Act; and
  8. Any entity in which all of the equity owners are Accredited Investors.
In order to be considered an Accredited Investor, an employee benefit plan will be required to meet one of the following conditions: (a) the investment decision for the employee benefit plan is made by a plan fiduciary which is either a bank, savings and loan association, insurance company or registered investment advisor; (b) the employee benefit plan has total assets in excess of $5,000,000; (c) in the case of self-directed employee benefit plans, investment decisions are made solely by persons that are Accredited Investors; or (d) the plan is established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000.

Post Update: I recently received this email which was reminded me of my goal to be write for those interested in learning about hedge funds around the world and not just within the United States. Here is what the email said:

Richard, I understand that you are not offering legal advice, but your response seems to me to be overly US centric. I cover investors in Japan and Korea where this term has a specific meaning, each unique and different from the US version. Every jurisdiction tries to establish its own safeguards in order to protect public investors in its country from exposure to solicitation of unregistered securities - such as hedge funds - by unregulated sales people. Most definitions seek to establish a threshold, usually according to wealth or sophistication, where such safeguards will not be necessary.

I agree, thanks for the note.

- Richard

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