An issuer planning a Regulation D private placement is deciding whether to admit any non-accredited investors. Which features of the offering turn on that decision?

Who may take part without full registration, how much disclosure must be given, and how many non-accredited investors may join

The maximum dollar amount that may be raised, the price of the securities, and whether an underwriter must commit its own capital

The length of the marketing period, whether investor funds go into escrow, and which audit firm the issuer must appoint

The holding period on resale, the minimum investment per purchaser, and the review fee the issuer must pay to FINRA

An individual earned $260,000 last year and $180,000 the year before, and expects $250,000 this year. Her net worth is $1.4 million, of which $600,000 is the equity in her primary residence. She holds no securities licence. How is she classified?

Accredited, because her total net worth of $1.4 million clears the net worth threshold, the home counting as an asset she owns

Non-accredited, since she lacks two years above $200,000 and holds only $800,000 net of her residence

Accredited, because her income last year and her expected income this year both exceed $200,000, which meets the income test

Accredited, because her income averaged $220,000 across the two most recent years, above the $200,000 individual threshold

Two unmarried partners who live together as spousal equivalents have a combined net worth of $1.3 million excluding their home; each individually holds $650,000. One of them wants to invest in a private placement. How is she classified on the net worth test?

Non-accredited, because a joint net worth test requires the couple's combined figure to exceed double the individual threshold

Non-accredited, because joint measurement is available only to married spouses, leaving her with $650,000 of her own

Accredited, because net worth may be measured jointly with a spousal equivalent, and their combined figure clears the threshold

Accredited only if her partner subscribes alongside her, since a joint test qualifies the couple solely as one combined purchaser

A retired schoolteacher with little investment experience meets none of the accredited investor tests and wants to join a Rule 506(b) offering. On what condition may she be one of its non-accredited purchasers?

That the issuer first obtains FINRA's approval to admit a purchaser who does not meet the accredited investor tests

That she certifies in writing that she has read the offering memorandum and accepts all the risks it describes

That her investment stays below a fixed share of her net worth that the issuer sets for each non-accredited purchaser

That she, alone or together with a purchaser representative, can evaluate the merits and risks of the investment

What does admitting even a single non-accredited investor to a Rule 506(b) offering require of the issuer?

Disclosure to every investor of substantially the information a registered offering requires, including audited financial statements

Delivery of registered-style disclosure to the non-accredited purchaser alone, the accredited investors in the offering receiving none of it

Approval of the offering by the securities regulator of every state in which a non-accredited purchaser lives, before any sale is made

A short risk summary for the non-accredited purchaser only, fuller disclosure becoming necessary once the non-accredited count passes ten

Rule 506(c) lets an issuer use general solicitation and general advertising, which Rule 506(b) prohibits, but only if every purchaser is an accredited investor. What concern explains excluding non-accredited investors as the price of that freedom?

Advertised offerings raise larger sums, which would carry the issuer past the dollar cap that applies to every exempt private offering

Mass marketing could draw them into speculative private offerings without the disclosure protections of a registered offering

Advertising would leave the issuer unable to keep its count of non-accredited purchasers within the number the exemption permits

General solicitation obliges the issuer to file its advertising with FINRA, which reviews such filings only for accredited investors

A venture capital firm and a non-accredited individual are each considering an investment in the same private company. What gives the firm an evaluation the individual is unlikely to be able to match?

Its exemption from the securities laws, which lets it trade on private company information that the individual may not use

Its accredited investor status, which entitles it under Regulation D to management meetings and inspection of company records

Its relationships, expertise and bargaining power to negotiate management meetings, records access and full due diligence

Its access to the company's registration statement, which is filed for inspection by institutional investors and no one else

Two investors each lose $40,000 on a failed private placement, one with a net worth of $4 million and the other with a net worth of $80,000, both having had identical information about the deal. How does the loss differ between them?

About one percent against half, which the framework addresses by capping private placement losses at a share of net worth

About one percent against half, but equal dollar losses mean the two suffered the same harm and need the same protection

About ten percent against five percent, so the wealthier investor in fact suffered the more damaging loss of the two

About one percent against half, so the same loss is a setback for one and potentially devastating for the other

Why does the illiquidity of private securities weigh especially heavily on non-accredited investors?

Needing capital for living costs or emergencies, they may be unable to exit except by a distressed sale or must keep holding

The issuer must redeem their shares at net asset value on request, draining cash the company needs and lowering the value of the remaining shares

Their shares become freely tradable on an exchange once the offering closes, exposing them to daily price swings they cannot absorb

The placement agent must repurchase their shares at the original price, a cost that is passed back to them through higher placement fees

A non-accredited investor wants to buy into a Tier 2 Regulation A offering. How does the framework limit her participation?

She may not participate at all, Tier 2 offerings being reserved for accredited investors and Tier 1 open to everyone

Her investment may be no more than ten percent of her annual income or net worth

She faces no individual cap, the offering circular's prospectus-like disclosure taking the place of any investment limit

Why did Congress and the SEC create pathways such as Regulation A and Regulation Crowdfunding through which non-accredited investors can buy into offerings?

Smaller companies were barred from registered public offerings and needed some exemption in order to raise any capital

Registered public offerings had become too slow for retail investors, who wanted a quicker route into new issues

Excluding them entirely was seen as overly restrictive and as limiting smaller companies' access to retail capital

The accredited thresholds had been found to admit too many households, so a separate channel was needed to divert them

Regulation Crowdfunding caps how much a non-accredited investor may put into crowdfunding offerings each year. What is that cap designed to prevent?

A portal taking in more investor money than it can hold in escrow while each of its offerings remains open

An issuer raising more than its annual offering ceiling from the investors registered on any one crowdfunding portal

A single investor gaining a controlling stake in a small company through its crowdfunding round at an unfair price

Concentration of an excessive share of the investor's limited resources in speculative crowdfunding investments

A non-accredited client with $90,000 of savings, most of it earmarked for living expenses, is eligible to invest in a Regulation Crowdfunding offering and wants to put in the maximum her limit allows. What must her adviser still do?

Assess whether that amount suits her total resources and liquidity needs, given how illiquid and speculative the investment is

Nothing further, since any amount within the crowdfunding limit is treated by regulation as suitable for a non-accredited investor

Obtain the portal's written confirmation that the offering suits her before passing on her subscription to the issuer

Refuse the order outright, since advisers may never recommend a crowdfunding investment to a client who is non-accredited

An issuer conducting a Rule 506(b) offering without general solicitation receives a questionnaire in which an investor represents that he is accredited. When may the issuer rely on it?

Only after it obtains independent evidence of his finances from documents he supplies to the issuer

Without independent verification, unless the issuer has reason to believe the representation is false

Provided he also holds a Series 7, Series 65 or Series 82 licence that is in good standing

Never, since self-certification is accepted only from investors that are entities rather than individuals

In a Rule 506(c) offering, an investor claims accredited status on the basis of his net worth rather than his income. Which review fits that basis as a reasonable verification step?

Reviewing his tax returns for the two most recent years

Reviewing a letter from his employer confirming his salary and expected bonus

Reviewing his bank or brokerage account statements

Accepting his signed questionnaire stating his net worth

Non-Accredited Investor | Regulation D Thresholds

Non-Accredited Investor: Who Falls Outside the Accredited Threshold

A non-accredited investor is any individual or entity that does not meet the financial sophistication and wealth thresholds established by the Securities and Exchange Commission in Regulation D under the Securities Act of 1933 to qualify as an accredited investor. Non-accredited investors are presumed by the regulatory framework to have less financial sophistication, fewer resources to absorb potential investment losses, and less access to information about private investment opportunities than accredited investors, and they are therefore afforded additional regulatory protections including restrictions on the types of investments they can access without the full disclosure and registration requirements of the federal securities laws.

The distinction between accredited and non-accredited investors is one of the most practically important distinctions in the regulation of private securities offerings, determining who may participate in Regulation D private placements without the full registration requirements of the Securities Act, the extent of disclosure required for offerings that include non-accredited investors, and the maximum number of non-accredited investors that can participate in certain exempt offerings without triggering additional regulatory requirements.

Understanding the non-accredited investor concept and its regulatory implications is essential for investment professionals who advise clients on private investment opportunities, work with issuers conducting private placements, or must assess the suitability of alternative investments for their client base.

The Accredited Investor Definition and Its Complement

To understand what constitutes a non-accredited investor, it is necessary to first understand the accredited investor definition that establishes the boundary between the two categories. Rule 501 of Regulation D defines an accredited investor to include several categories of individuals and entities.

For individuals, the primary financial thresholds for accredited investor status are a net worth exceeding one million dollars individually or jointly with a spouse or spousal equivalent, excluding the value of the primary residence as discussed in the Net Worth article, or annual income exceeding two hundred thousand dollars in each of the two most recent years with a reasonable expectation of the same income level in the current year, or three hundred thousand dollars jointly with a spouse or spousal equivalent applying the same two-year history and current year expectation.

The Dodd-Frank Act and subsequent SEC amendments have also expanded the accredited investor definition to include individuals holding certain professional certifications, designations, or credentials demonstrating financial sophistication, most notably holders of the Series 7, Series 65, or Series 82 licences in good standing, and knowledgeable employees of certain private funds.

For entities, accredited investor status is available to banks, registered broker-dealers, insurance companies, registered investment companies, and business development companies regardless of their size, and to other entities including corporations, partnerships, limited liability companies, and trusts with total assets exceeding five million dollars if not formed for the specific purpose of acquiring the securities being offered, and to any entity in which all of the equity owners are accredited investors.

A non-accredited investor is simply any individual or entity that does not satisfy any of these accredited investor criteria. The vast majority of the US population falls into the non-accredited investor category, as the one million dollar net worth threshold and the two hundred thousand dollar income threshold exclude most households from accredited investor status.

This broad exclusion reflects the regulatory judgment that the majority of individuals lack the financial resources and sophistication to evaluate and absorb the risks of unregistered private securities offerings without the protections of the full registration and disclosure framework of the Securities Act.

Regulatory Implications of Non-Accredited Investor Status

The inclusion of non-accredited investors in a private securities offering has significant regulatory consequences that affect both the structure of the offering and the disclosure obligations of the issuer.

Under Rule 506(b) of Regulation D, the most commonly used exemption for private placements, issuers may sell securities to an unlimited number of accredited investors and up to thirty-five non-accredited investors in any single offering, provided that each non-accredited investor either alone or with a purchaser representative has such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.

This sophistication requirement for non-accredited investors participating in Rule 506(b) offerings reflects the regulatory concern that non-accredited investors who lack financial sophistication in addition to failing to meet the wealth thresholds are particularly vulnerable to harm from inadequately understood private investment risks.

The inclusion of even a single non-accredited investor in a Rule 506(b) offering triggers additional disclosure requirements that do not apply to offerings made exclusively to accredited investors. Specifically, if non-accredited investors are included, the issuer must provide all investors with disclosure documents containing substantially the same information as would be required in a registered offering, including audited financial statements for specified periods. This disclosure requirement significantly increases the cost and complexity of private placements that include non-accredited investors, creating a strong practical incentive for issuers to limit their offerings to accredited investors only.

Rule 506(c) of Regulation D, added by the JOBS Act of 2012, allows issuers to engage in general solicitation and general advertising of their private offerings, which is prohibited under Rule 506(b), but only if all purchasers in the offering are accredited investors and the issuer takes reasonable steps to verify the accredited investor status of all purchasers.

The ability to use general solicitation is conditioned on the exclusion of all non-accredited investors, reflecting the regulatory concern that general solicitation could expose non-accredited investors to speculative private offerings through mass marketing channels without the disclosure protections applicable to registered offerings.

Protecting Non-Accredited Investors

The regulatory framework's differentiated treatment of accredited and non-accredited investors reflects several important rationales for providing non-accredited investors with additional protections in the private securities markets.

The information asymmetry argument holds that non-accredited investors typically lack the access to management, legal counsel, accountants, and other information sources that sophisticated institutional and high-net-worth investors use to evaluate private investment opportunities. A venture capital firm considering an investment in a private company can negotiate for detailed financial information, management meetings, references from other investors, and full access to company records through a comprehensive due diligence process.

A non-accredited individual investor is unlikely to have the relationships, expertise, or bargaining power to obtain comparable access to information, placing them at a fundamental informational disadvantage relative to the sophisticated investors they would be co-investing with.

The risk absorption argument holds that even if non-accredited investors could obtain adequate information about a private investment, their more limited financial resources mean that they have less capacity to absorb losses from unsuccessful investments. An accredited investor with a net worth of five million dollars who loses fifty thousand dollars on a failed private placement has suffered a one percent loss of their net worth, an uncomfortable but manageable setback.

A non-accredited investor with a net worth of one hundred thousand dollars who loses fifty thousand dollars has suffered a fifty percent loss of their net worth, a potentially devastating financial blow that could permanently impair their financial security.

The liquidity argument notes that private securities are typically illiquid, with no ready secondary market in which investors can sell their holdings if they need to access their capital or if the investment deteriorates. Non-accredited investors who need their capital for living expenses, emergencies, or other financial obligations may find themselves unable to exit a private investment when they need liquidity, a circumstance that could force them to accept a distressed sale price or to maintain an illiquid position they can no longer afford to hold.

Regulation A and Crowdfunding: Pathways for Non-Accredited Investors

Recognising that the complete exclusion of non-accredited investors from private capital markets may be overly restrictive and may limit the ability of smaller companies to access a broader pool of retail capital, Congress and the SEC have created several pathways through which non-accredited investors can participate in certain types of private or semi-private securities offerings with appropriate investor protections.

Regulation A, as modernised by the JOBS Act of 2012 and the subsequent SEC rulemaking, provides an exemption from full Securities Act registration for public offerings of up to seventy-five million dollars per year in a Tier 2 offering or twenty million dollars per year in a Tier 1 offering. Regulation A offerings may be made to both accredited and non-accredited investors, allowing companies to access retail investor capital without the cost and complexity of a full IPO.

Regulation A offerings are subject to significant disclosure requirements including offering circulars similar to prospectuses, ongoing reporting requirements for Tier 2 offerings, and investment limits for non-accredited investors in Tier 2 offerings that restrict individual investments to no more than ten percent of the investor's annual income or net worth.

Regulation Crowdfunding, established by the JOBS Act and implemented by the SEC under Regulation CF, allows companies to raise up to five million dollars per year from both accredited and non-accredited investors through registered crowdfunding portals. Non-accredited investors are subject to investment limits based on their annual income and net worth, with investors whose annual income or net worth is less than one hundred and seven thousand dollars limited to investing the greater of two thousand dollars or five percent of the lesser of their annual income or net worth, and investors above that threshold limited to ten percent of the lesser of their annual income or net worth up to a specified maximum per year.

These investment limits are designed to prevent non-accredited investors from concentrating an excessive proportion of their limited financial resources in speculative crowdfunding investments.

Suitability Considerations for Non-Accredited Investors

For investment advisers and broker-dealers advising non-accredited investors, the regulatory framework's differentiated treatment of this investor category has important implications for suitability analysis and client service.

The investment universe accessible to non-accredited investors in the private markets is significantly more limited than that available to accredited investors, reflecting the regulatory protections described above. Investment advisers serving non-accredited investor clients must be aware of these limitations and must not recommend private investments that are not available to non-accredited investors or that would require the client to qualify as an accredited investor for participation. Recommending a Rule 506(b) or Rule 506(c) offering to a non-accredited investor, or facilitating their participation in an offering that does not meet the requirements for non-accredited investor participation, would constitute a securities law violation as well as a potential suitability violation.

The broader suitability implications of a client's non-accredited investor status relate to the concentration risk and liquidity risk considerations that apply to any recommendation of illiquid private investments to investors with more limited financial resources. Even for non-accredited investors who are eligible to participate in Regulation A or crowdfunding offerings, the adviser must carefully assess whether the investment amount relative to the client's total financial resources and liquidity needs is appropriate given the illiquid and speculative character of most private investment opportunities.

Verification of Accredited Investor Status

The determination of whether a prospective investor qualifies as an accredited investor or must be treated as a non-accredited investor is an important compliance function for issuers conducting private placements and for broker-dealers and investment advisers who facilitate client participation in such offerings.

For Rule 506(b) offerings that do not use general solicitation, issuers may rely on representations made by investors about their accredited investor status without independent verification, provided the issuer does not have reason to believe the representations are false. This self-certification approach is the most common practice for traditional private placements, where the investor completes a subscription agreement or questionnaire representing their accredited investor status and the issuer relies on that representation.

For Rule 506(c) offerings that use general solicitation, the issuer must take reasonable steps to verify that all investors are actually accredited investors rather than relying solely on investor self-certification. The SEC has provided guidance on verification methods that constitute reasonable steps, including reviewing tax returns or W-2 forms to verify income-based accreditation, reviewing bank or brokerage statements to verify net worth-based accreditation, and obtaining written confirmation from a licensed attorney, accountant, registered broker-dealer, or registered investment adviser that they have taken reasonable steps to verify the investor's accredited status within the prior three months.

Examination Relevance and Key Takeaways

The non-accredited investor concept is tested on the Series 65 examination in the context of private securities offerings, the Regulation D exemption framework, investor protection principles, and the suitability obligations applicable when advising clients on private investment opportunities.

Candidates must understand the definition of a non-accredited investor as any individual or entity not meeting the accredited investor thresholds of Regulation D, the financial thresholds that separate accredited from non-accredited investors including the one million dollar net worth threshold excluding the primary residence and the two hundred thousand dollar individual or three hundred thousand dollar joint income threshold, the regulatory implications of including non-accredited investors in a Regulation D offering including the thirty-five non-accredited investor limit under Rule 506(b), the sophistication requirement for non-accredited investors, and the enhanced disclosure obligations triggered by their inclusion, and the alternative pathways for non-accredited investor participation in private capital markets through Regulation A and Regulation Crowdfunding.

The core points to retain are these: a non-accredited investor is any individual or entity failing to meet the accredited investor thresholds of one million dollars net worth excluding primary residence or two hundred thousand dollars individual income or three hundred thousand dollars joint income; the vast majority of the US population is non-accredited reflecting the regulatory judgment that most households lack the financial resources and sophistication to evaluate unregistered private investments without full disclosure protections; Rule 506(b) offerings may include up to thirty-five non-accredited investors who must be sophisticated and triggers enhanced disclosure requirements including audited financial statements comparable to registered offerings; Rule 506(c) offerings using general solicitation are restricted to accredited investors only requiring reasonable steps to verify each investor's status; Regulation A Tier 2 offerings up to seventy-five million dollars per year and Regulation Crowdfunding offerings up to five million dollars per year provide alternative pathways for non-accredited investor participation with investment limits and disclosure requirements providing investor protection; investment advisers must not recommend private investments to non-accredited investor clients where such investors are ineligible for participation; and the differentiated regulatory treatment of accredited and non-accredited investors reflects the information asymmetry, risk absorption, and liquidity arguments for providing additional protections to investors with more limited financial resources and sophistication.