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Difficulty: MediumMarket Participants and Investor Classifications

An individual investor reports an annual income of 180,000foreachofthepasttwoyearsandholdsatotalnetworthof180,000 for each of the past two years and holds a total net worth of 1.2 million, which includes $400,000 of equity in her primary residence. She intends to participate in a private placement offering of unregistered corporate stock under Regulation D. Which classification accurately describes this investor under federal securities regulations?

  1. She does not qualify as an accredited investor because her net worth excluding her primary residence is 800,000,whichfallsbelowthe800,000, which falls below the 1 million requirement.Answer
  2. B
    She qualifies as an accredited investor because her total net worth exceeds $1 million regardless of primary residence equity.
  3. C
    She qualifies as a Qualified Institutional Buyer (QIB) because her liquid net worth combined with annual income exceeds $500,000.
  4. D
    She requires prior individual approval and registration from FINRA before she may participate in any private placement offering.

Answer

The investor does not qualify as an accredited investor because her net worth excluding her primary residence is 800,000,whichfallsbelowthe800,000, which falls below the 1 million threshold required by Regulation D.
Under Rule 501 of Regulation D, an individual qualifies as an accredited investor if their net worth exceeds 1million(individuallyorjointlywithaspouse)atthetimeofpurchase,EXCLUDINGthevalueoftheirprimaryresidence.Subtracting1 million (individually or jointly with a spouse) at the time of purchase, EXCLUDING the value of their primary residence. Subtracting 400,000 in residence equity from 1,200,000totalnetworthyields1,200,000 total net worth yields 800,000, which fails to meet the 1millionrequirement.Additionally,her1 million requirement. Additionally, her 180,000 income falls below the $200,000 individual income threshold.

Step-by-Step Solution

1
Evaluate the income test threshold under Regulation D.
Individual income of 180,000isbelowthe180,000 is below the 200,000 individual requirement ($300,000 joint) for each of the last two years.
The investor does not qualify under the annual income standard alone.
2
Calculate net worth according to SEC Regulation D rules.
Total net worth of 1,200,000minus1,200,000 minus 400,000 primary residence equity equals $800,000 net worth.
Federal rules mandate that equity in a primary residence must be subtracted from total assets when determining accredited status.
3
Compare calculated net worth to the accredited investor net worth threshold.
800,000islessthantherequired800,000 is less than the required 1,000,000 threshold.
Because neither the income test nor the net worth test is satisfied, the investor does not qualify as accredited.

Key Concept

Accredited Investor Net Worth Calculation & Primary Residence Exclusion
Estimated Time:1m 0s
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Topics

Market Participants and Investor Classifications

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