Whenever a company offers or sells its securities, it must register with the US Securities and Exchange Commission (the “SEC”) or do its offering under the an exemption from the SEC’s registration requirements. For many angel rounds, the exemption used is Ruglation D of the Securities Act of 1933 (the “Act”). An important consideration when ascertaining whether an issuance is properly exempted under Reg D is an inquity into whether the investors are “accredited” under the Act. The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
1. a bank, insurance company, registered investment company, business development company, or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities;
5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
For more information about the SEC’s registration requirements and common exemptions, read the SEC’s brochure, Q&A: Small Business & the SEC.