An accredited investor is a person or entity that can deal with securities that have not been registered with financial authorities. These investors must satisfy one of the requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural individuals, banks, insurance companies, brokers and trusts.
The SEC has outlined the following conditions that investors need to fulfill to be regarded as an accredited:
A non-accredited investor is an investor who does not fulfill the above requirements set by the SEC. A non-accredited investor, therefore, is anyone making less than $200,000 annually (less than $300,000 including a spouse) that also has a total net worth of less than $1 million when their primary residence is excluded. Non-accredited investors make up the bulk of investors in the world. When people speak of retail investors, they often mean non-accredited investors.
Rule 506 of Regulation D provides exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money.
Private Placements – Rule 506(b)
According to the SEC, “Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2)”. It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:
If non-accredited investors are participating in the offering, the company conducting the offering:
General Solicitation – Rule 506(c)
According to the SEC, “this rule permits issuers to broadly solicit and generally advertise an offering”, provided that:
Purchasers in a Rule 506(c) offering receive “restricted securities.” A company is required to file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have authority to require notice filings and collect state fees. In a separate article we cover filing fees for each state.
Rule 144A is a Securities and Exchange Commission (SEC) rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves. This has substantially increased the liquidity of the securities affected because institutions can trade these securities among themselves, sidestepping limitations imposed to protect the public.
The major objective of Rule 144A is to create a mechanism for the sale of privately placed securities that do not have, and are not required to have, an SEC registration in place, creating a more efficient market for the sale of said securities.
Rule 144A Holding Requirements
Before there can be any transaction with any restricted securities, it must be held for a predefined period of time. If the said holder of securities is a company that comes under the purview of the Securities Exchange Act of 1934, also known as a “reporting company”, then such a company must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for. The holding period only applies to restricted securities. Because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. However, the resale of an affiliate’s shares as control securities is subject to the other conditions of the rule.
Akshat Bhargava contributed to this report.
 Investopedia Staff, Accredited Investor Investopedia (2018), https://www.investopedia.com/terms/a/accreditedinvestor.asp (last visited Sep 21, 2018).
 Private placements – Rule 506(b), SEC EMBLEM (2017), https://www.sec.gov/smallbusiness/exemptofferings/rule506b (last visited Sep 21, 2018).
 General solicitation – Rule 506(c), SEC EMBLEM (2017), https://www.sec.gov/smallbusiness/exemptofferings/rule506c (last visited Sep 21, 2018).
 Investopedia Staff, RULE 144A INVESTOPEDIA (2018), https://www.investopedia.com/terms/r/rule144a.asp (last visited Sep 21, 2018).