The Two Definitions of Accredited Investor

You may not be aware, but the federal securities laws contains two definitions of the term accredited investor.

One definition is helpful to startups, and the other is not.

The definition of accredited investor that is helpful to startups is found in Regulation D.

Rule 506 of Regulation D is the securities law exemption used by startups in almost every angel and venture financing. Thus, it is the definition of the term “accredited investor” in Regulation D that is critical to startups.

The securities law also defines “accredited investor” in Section 2(a)(15) of the Securities Act. But this definition only relates to the exemption found in Section 4(6). The exemption in 4(6) is not helpful to startups, because 4(6) does not federally preempt state law and the amount you can raise is capped at $5 million. Thus, startups never use the 4(6) exemption.

When Congress suggests improvements to the definition of accredited investor, if they propose amendments to the 4(6) definition, it is not helpful to startups at all.

From time to time, Congress does this. You might find this old blog post helpful on this topic.

The only reason I bring this up is because it appears this is happening again with the Schweikert bill.

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