The term "accredited investors" is defined by the U.S. Securities and Exchange Commission (SEC) as individuals with a net worth (not including a primary residence) in excess of $1 million, or individuals with a gross income of at least $200,000 ($300,000 for joint income with a spouse) for each of the two last years. The individual must have the expectation that the same level of income will continue in the current year. The definition for accredited investor is contained in Rule 501 of Regulation D of the Securities Act of 1933 (Reg D).

Rule 506 of Reg D contains an exception to the accredited investor requirement, and states up to 35 non-accredited investors may invest in a private placement offering. Rule 506 places standards on the type of non-accredited investors which can participate, stating that non-accredited investors must have knowledge and experience in financial and business matters such that they are capable of evaluating the merits and risks of the private placement. This is an ambiguous standard, and it can be difficult to prove if there is later litigation over a private placement investment. Rule 506 further contains additional information disclosures if the placement includes non-accredited investors. The required information is similar to that of public companies. There is another accredited-investor exemption in Rule 504, which allows for a company to raise less than $1 million in a 12-month period, and contains no restriction on selling securities to accredited investors. However, all solicitation done under Rule 504 must be in compliance with state securities regulations.

Reg D provides an exemption to the SEC to registration requirements for private placements. Private placements are companies offering securities in non-public offerings that are not required to comply with certain portions of federal securities laws. Companies rely on Reg D to claim exemption from SEC requirements. Reg D allows smaller companies to access capital without having to go through the expensive process of a public offering.

The SEC generally limits private placement investments to accredited investors due to risk. Private placements have greater risk for a couple of reasons. There is limited information available about the company issuing the securities. No regulatory background checks have been performed on the company’s management. The financial information has not been reviewed by any regulatory agency, and it has not been publicly disclosed. This makes it difficult to ascertain the accuracy of the financial information contained in the private placement offering memorandum. The limited information for a private placement makes it more difficult to adequately weigh the risk of an investment.

Another factor making private placements risky that private securities are illiquid. Since the securities are not publicly traded, investors may be forced to hold the securities for a long time if they are not able to find a suitable buyer for the securities. Private securities are also illiquid since they may only be sold to other accredited investors, which reduces the pool of possible purchasers.

  1. What factors might make a private placement a risky investment?

    Learn about purchasing securities through a private placement investment, and understand the risk factors associated with ... Read Answer >>
  2. What are the disclosure requirements for a private placement?

    Learn about the SEC rules for disclosure requirements in private placement offerings, and understand what type of information ... Read Answer >>
  3. How does private placement affect share price?

    Understand what it means when a company does a private placement, and learn how this typically impacts the share price of ... Read Answer >>
  4. What is the difference between an IPO and a private placement?

    Learn the differences between private placements and initial public offerings that companies use to raise capital through ... Read Answer >>
  5. What are Some Advantages of Raising Capital Through Private Placement?

    Understand how a business can raise capital through private placement and the benefits business owners receive through this ... Read Answer >>
  6. The SEC's Rule 144

    A. regulates public resale of privately placed securities. B. regulates private placement of unregistered securities.C. defines ... Read Answer >>
Related Articles
  1. Investing

    Understanding Private Placement

    Private placement refers to offering and selling shares in a company to a small group of sophisticated buyers.
  2. Managing Wealth

    How to Become an Accredited Investor

    Accredited investors have more opportunities, such as investing in private equity. But, surprisingly, there is no set process for becoming one.
  3. Investing

    Who is an Accredited Investor?

    Essentially, accredited investors are knowledgeable and experienced enough to handle the risk that comes with investing in unregistered securities.
  4. Managing Wealth

    How Pro Athletes Can Protect Themselves as Investors

    Professional athletes with a high net worth need to understand the accredited investor status.
  5. Managing Wealth

    How To Invest In Private Companies

    It can be tough to analyze a company that doesn't trade publicly, but there are several advantages.
  6. Investing

    Advantages of Public Vs. Private Companies

    A privately held company is owned by its founder, management or a group of private investors.
  7. Small Business

    How To Invest In Private Companies

    Owning a private firm means sharing more directly in the underlying firm’s profits.
  8. Small Business

    Non-Accredited Investors: Make Money in Crowdfunded Investments

    The JOBS Act will soon afford non-accredited investors the opportunity to participate in crowdfunded investments under recently finalized Title III rules.
  9. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  10. Investing

    Top Alternative Investments for Retirement

    Diversify your retirement portfolio with alternative investments – peer-to-peer lending, precious metals, even Bitcoins.
  1. Placement

    The sale of securities to a small number of private investors ...
  2. Private Placement

    The sale of securities to a relatively small number of select ...
  3. Regulation D - Reg D

    A Securities and Exchange Commission (SEC) regulation governing ...
  4. Non-Accredited Investor

    An investor who does not meet the net worth requirements for ...
  5. Accredited Investor

    A term used by the Securities and Exchange Commission (SEC) under ...
  6. Placement Agent

    An intermediary who raises capital for investment funds.
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center