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Difficulty: MediumMarket Participants and Investor Classifications

An individual investor has maintained an annual earned income of 160,000overeachofthepastthreeyears.Theinvestor′sbalancesheetreflectsatotalnetworthof160,000 over each of the past three years. The investor's balance sheet reflects a total net worth of 1,350,000, which includes $400,000 of net equity in their primary residence. Under Regulation D of the Securities Act of 1933, which of the following statements correctly classifies this investor?

  1. The investor does not qualify as an accredited investor because both their annual income and their net worth excluding primary residence equity fall below the required thresholds.Answer
  2. B
    The investor qualifies as an accredited investor because their total net worth of 1,350,000exceedsthe1,350,000 exceeds the 1,000,000 net worth threshold.
  3. C
    The investor qualifies as a Qualified Institutional Buyer (QIB) because their net worth is greater than $1,000,000.
  4. D
    The investor qualifies as an accredited investor because their 160,000annualincomesatisfiesthe160,000 annual income satisfies the 150,000 individual income threshold for natural persons.

Answer

The investor does not qualify as an accredited investor because both their annual income and their net worth excluding primary residence equity fall below the required regulatory thresholds.
Under Regulation D of the Securities Act of 1933, a natural person qualifies as an accredited investor if they meet an income threshold (more than 200,000individuallyor200,000 individually or 300,000 jointly in each of the last two years with an expectation of the same in the current year) OR a net worth threshold exceeding 1,000,000,excludingthevalue/equityoftheirprimaryresidence.Subtracting1,000,000, excluding the value/equity of their primary residence. Subtracting 400,000 of primary residence equity from the total net worth of 1,350,000leaves1,350,000 leaves 950,000, which is under 1,000,000.Additionally,1,000,000. Additionally, 160,000 annual income is below the $200,000 requirement. Thus, the investor fails both qualification criteria.

Step-by-Step Solution

1
Evaluate the investor against the income test under Regulation D.
The investor earns 160,000annually,whichisbelowtheindividualthresholdof160,000 annually, which is below the individual threshold of 200,000 (or $300,000 joint) for each of the prior two years.
Passing the income test requires earning more than 200,000individuallyor200,000 individually or 300,000 jointly with a spouse.
2
Calculate net worth excluding primary residence equity.
Net worth = 1,350,000totalnetworth−1,350,000 total net worth - 400,000 primary residence equity = $950,000.
Regulation D mandates that net equity in a primary residence must be excluded when determining accredited investor status based on net worth.
3
Evaluate the calculated net worth against the accredited investor net worth threshold.
950,000islessthantherequired950,000 is less than the required 1,000,000 net worth threshold.
Because the investor fails both the income test and the adjusted net worth test, they do not qualify as an accredited investor.

Key Concept

Accredited Investor Thresholds and Primary Residence Exclusion
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Topics

Market Participants and Investor Classifications

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