NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
A client is interested in investing in a private placement offering. They are a successful entrepreneur with a net worth exceeding $5 million and have extensive experience in evaluating complex business ventures. Which of the following terms best describes this client's eligibility to participate in such an offering?
- ASophisticated Investor
- BAccredited Investor
- CInstitutional Investor
- DQualified Purchaser
Show answer & explanationAnswer & explanation
Correct answer: B. Accredited Investor
An 'Accredited Investor' is a specific SEC designation for individuals or entities that meet certain income or net worth requirements ($1 million net worth, excluding primary residence, or $200k/$300k income for individuals/couples). The client's net worth of $5 million clearly qualifies them as an Accredited Investor, which is typically required for private placement offerings.
Why the other options are wrong
- A. While the client is a 'Sophisticated Investor' due to their experience, this term is not a formal SEC designation for private placement eligibility; 'Accredited Investor' is the legal standard.
- C. An Institutional Investor typically refers to large organizations like pension funds or endowments, not an individual, even a wealthy one.
- D. A Qualified Purchaser has an even higher threshold ($5 million in investments for individuals), and while this client might meet it, 'Accredited Investor' is the more direct and commonly cited term for eligibility in private placements.
Accredited Investor
An individual or entity that meets specific income or net worth requirements, allowing them to invest in certain securities offerings not registered with the SEC (e.g., private placements).
- Individual: Net worth > $1 million (excluding primary residence) OR income > $200k ($300k for couples) for two most recent years.
- Allows participation in private placements and hedge funds.
- Assumed to have sufficient financial sophistication to understand risks.
Memory trick: Accredited: Access to private deals if you're Rich or a Regular High Earner.