Investors commonly invest in startup companies and other securities offerings using some type of limited liability entity as opposed to investing as an individual investor. When you invest as a company or entity (i.e. an LLC), it is essential to keep in mind the accredited investor definition per the SEC so that you can determine if your entity qualifies as an accredited investor per SEC Rule 501.
Investors often prefer to invest under the shield of a limited liability entity rather than as an individual. Knowing when the LLC entity is legally considered an accredited investor is beneficial to the entity raising funds and the investor.
SEC Rule 501 and the Accredited Investor Definition
Per Regulation D of SEC Rule 501 of the 1933 Securities Act, an entity qualifies as an accredited investor if each of the owners of equity in the entity is themselves accredited investors. For example, if the exclusive member of an LLC has a yearly income of $200,000 (or $300,000 combined with a spouse) or possesses a net worth of $1 million (minus his or her primary residence), that person’s LLC is also recognized as an accredited investor.
Other Entities That Qualify as Accredited Investors
Certain entities are counted in the category of accredited investors. These include certain private business development companies, trusts, and financial institutions. Here, we are covering only entities other than those categories.
According to the SEC requirements, a company that offers securities for sale to investors must register that securities offering unless it is operating under one of the exemptions that frees it from registration requirements. Some of the exemptions require every investor in an offering to be an accredited investor. This is done in order to ensure high income and high net worth persons and entities who have better financial positioning to handle the risks involved will invest in private companies.
If you are operating under one of these exemptions when investing in a company’s securities, you are required to certify yourself as an accredited investor. If you are investing as an LLC and not an individual, the LLC must verify, according to the accredited investor definition, that it qualifies as an accredited investor.