Information about Accreditation
Under the federal securities laws, a firm that offers or sells securities to investors must register the securities with the SEC or find an exemption from the registration requirements. The federal securities laws provide for a number of possible exemptions. Under the Rule 506 exemption of Regulation D, a company may avoid registration by restricting the sale of its securities to what are known as accredited investors. The term accredited investor is defined in Rule 501 of Regulation D to include:
- Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.
- Except the person’s primary residence shall not be included as an asset;
- Indebtedness that is secured by the person’s primary residence is excluded and excess indebtedness may need to be treated as liability;
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
- Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person; and
- Any entity in which all of the equity owners are accredited investors.
For the purposes of establishing your status as an Accredited Investor, you can provide copies of relevant portions of your tax return for each of the prior two years, showing such income. Alternatively, you may provide copies of statements from investment accounts or have your professional investment manager or advisor provide a letter of affirmation attesting to the existence of your assets, based upon their personal knowledge of your assets, and hence your status. Lastly, the SEC has recently issued new guidance expanding on the definition to include individuals with investment expertise. If you think you qualify as an expert, please contact us to review those confirmation requirements.
The following is a list of the key forms or documents to be completed and/or signed as part of LP participation in the fund.
- Subscriber Interest Form (available online)
- Confirmation of Accredited Investor status
- Fund Documents, consisting of:
A. Limited Partnership Agreement (LPA)
B. Private Placement Memorandum (PPM)
C. Subscription Agreement
- Non-Disclosure Agreement (NDA) (optional)
Additional Legal Resources
Suz Mac Cormac of MoFo discusses the integration of ESG factors into the investment strategies of most funds in “ESG Goes Mainstream: How “Return First” PE Funds Can Factor ESG Considerations into Their Investment and Portfolio Management Strategies.”