Author Topic: Assets that Count Towards Qualifying as an Accredited Investor  (Read 4825 times)

maizeman

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This seems like a straightforward issue.

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An accredited investor, in the context of a natural person, includes anyone who:
-earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
-has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

From the PDF here (https://www.sec.gov/files/ib_accreditedinvestors.pdf), it looks like retirement accounts do count towards the net worth qualification, so it's clear the $1M doesn't all have to be in forms which could be used for investments open only to accredited investors.

However, the specific complexity I'm trying to unravel is whether I'd be able to count illiquid equity stakes in privately held companies? And if they do count, how much or what type of documentation/reasoning would one need to support the valuation used?

In my personal case, one company has substantial cash flow, but has mostly grown organically and never had to raise equity from anyone other than the founders. A second had a significant equity investment at a valuation which would value my shares at more than enough to span the gap between the rest of my net worth and the minimum needed to qualify as an accredited investor, but the round was several years ago. A third has a lot of IP that we're arguing is quite valuable, but we're still negotiating with investors about what our actual pre-money valuation will be when they put their money in.

It seems like a long shot, but couldn't hurt to ask.

tralfamadorian

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #1 on: April 07, 2018, 12:25:02 PM »
Have you thought about giving one of the verification companies a call? I'm sure they've seen issues like this before. Maybe they would been able to shine some light on the requirements without you having to pay.

ie: https://verifyinvestor.com

maizeman

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #2 on: April 08, 2018, 07:00:47 AM »
That's a really clever idea @tralfamadorian, thanks!

Digging through their website it sounds like the key thing for whoever I'm investing with is to have someone like these folks sign off on my accredited investor status, and at least for this company the ideal thing would be to have a formal valuation done (ugh) or get a sufficiently unbiased statement of value from the company itself (source <-- unfortunately a PDF).

I also got a bit of a laugh out of this question/answer pair from their FAQ.

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How do I use my cryptocurrency as evidence of assets?

Generate a statement from your cryptocurrency account or wallet ideally showing the account holder name and amount of holdings. Please also provide a link to a website that shows the value of the cryptocurrency in USD or provide a screenshot. The reviewer may ask for you to create a cryptographic proof of ownership by signing a message.

I guess this is an issue that much come up fairly often for them these days.

seattlecyclone

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #3 on: April 08, 2018, 12:19:58 PM »
That primary residence rule is weird. You exclude the value of your house and the mortgage, meaning that paying off your mortgage could make you no longer an accredited investor even though that action is completely neutral to your actual net worth.

PDXTabs

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #4 on: April 10, 2018, 09:58:25 AM »
Dumb question:

Does anyone know if I make $200K for two (or three) years if I permanently become an accredited investor? Or can the status be stripped from me?

maizeman

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #5 on: April 10, 2018, 10:14:26 AM »
I believe it is specifically $200k (or $300k if married) the last two years, plus an expectation of making the same this year.

So yeah, I could envision particularly someone who hit FI and retired might go from being an accredited investor one year to no longer being an accredited investor the next year. 

seattlecyclone

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #6 on: April 10, 2018, 10:27:02 AM »
Yeah, it's not a permanent thing. It's based on your income and/or assets at the time you seek to make an investment that would require accredited investor status.

jlcnuke

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #7 on: April 11, 2018, 12:33:38 PM »
I believe it is specifically $200k (or $300k if married) the last two years, plus an expectation of making the same this year.

So yeah, I could envision particularly someone who hit FI and retired might go from being an accredited investor one year to no longer being an accredited investor the next year.

Well, if they retired then their earned income would likely be $0 or thereabouts, meaning they'd have to qualify based on NW if they wanted to be considered an accredited investor going forward.

Lucky Penny Acres

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #8 on: April 11, 2018, 06:03:53 PM »
In my experience, most investments where you need to certify accredited investor status don't look into your income or net worth details very closely.  As long as you check the box saying you have the right income and/or net worth and sign it, there usually aren't any follow up questions requiring any detailed proof of status or submission of additional supporting materials. YMMV

Also, typically accredited investor status is usually only required to be measured at the time an investment is made. So, if you qualify as an accredited investor and make an investment now and then no longer qualify as an accredited investor next year, you aren't required to sell the investment immediately.

maizeman

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #9 on: April 12, 2018, 06:49:13 AM »
That does suggest an interesting question to me though. What happens if you agree to invest in a company as a qualified investor and the agreement includes several tranches of investment over multiple years (I've seen such agreements, although on the receiving rather than investing end), but by the time one of the investments you committed to comes around you're no longer a qualified investor?

In the case I'm thinking of, investors forfeit their existing equity if they didn't participate in the later sets of investment they'd committed themselves to, so they could end up being a pretty sticky situation if it turned out they needed to be a qualified investor each time they cut a check.

Lucky Penny Acres

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #10 on: April 12, 2018, 09:23:48 AM »
That does suggest an interesting question to me though. What happens if you agree to invest in a company as a qualified investor and the agreement includes several tranches of investment over multiple years (I've seen such agreements, although on the receiving rather than investing end), but by the time one of the investments you committed to comes around you're no longer a qualified investor?

It likely varies based on the particular investment and their requirements.

In my experience, some require re-qualification each time more money is invested and others only require qualification at the start because you are really only making the investment decision at the start and then are contractually obligated to make the additional investments in subsequent years so those additional investments aren't really new investment decisions and so don't trigger the need for re-qualification.

Mighty-Dollar

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #11 on: April 12, 2018, 11:37:19 PM »
An accredited investor
Whenever I see these words I RUN from whatever investment it may be. Do not invest in private equity. Fastest way to lose 100% of your money.
Stick with publicly traded securities that have ticker symbols like ITOT and BND.

tralfamadorian

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #12 on: April 13, 2018, 06:13:03 AM »
...Fastest way to lose 100% of your money.

What data do you have to back that up?

Cycling Stache

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #13 on: April 17, 2018, 09:28:55 AM »
Agree that one should be careful with offerings to accredited investors, although there is nothing inherently wrong with it.

Accredited investor status is what allows an offering not to comply with the securities regulations on offering an investment.  If a company offers something only to accredited investors, they are at best pushing the liability of non-disclosures to the investor (assuming it's short of fraud) and at worst trying to avoid registering the offering as a security with the SEC by claiming that they only offer to accredited investors.

If a company asks you to self-certify with no follow up, I would have increased concern that it's option 2.*

One additional point.  There is an SEC Form D that an entity files claiming that an offering is exempt from registering as a security because it's only being sold to accredited investors.  If someone claims that the SEC has "approved" the offering based on that form, that information is false.  The Form D is simply a notification to the SEC that the offering is exempt from SEC registration.  (There are also registration requirements for many states as well.)

*Adding the language from one of the statutes governing Form D exceptions.  What it highlights is that the issuer has to take reasonable steps to verify that investors are accredited.

§230.506   Exemption for limited offers and sales without regard to dollar amount of offering. . . .

(ii) Verification of accredited investor status. The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.

Lucky Penny Acres

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Re: Assets that Count Towards Qualifying as an Accredited Investor
« Reply #14 on: April 17, 2018, 10:10:11 AM »

Yeah, this is strange.  Also, in the converse someone close to the investible asset threshold could apparently become an accredited investor by taking out a mortgage on their house.

The SEC was concerned with the increase in housing values in the early 2000s making a bunch of people into accredited investors because of a $1 million net worth primarily from their house that really didn't understand and couldn't afford the risk of investing a substantial portion of their liquid net worth in private investments so they excluded house value from the net worth calculation. 

Also, the rule technically requires that you include any mortgage (i.e., subtract the mortgage amount from your net worth) taken out on your house within the 60 days prior to investing unless the mortgage was part of the initial purchase of the house. This would at least delay someone from taking out a mortgage on their house to immediately make an investment as an accredited investor. After the 60 days though, the person would still qualify as an accredited investor.