NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A client, a high-net-worth individual, is considering a private placement offering. The offering memorandum states that the investment is exempt from SEC registration under Regulation D. To qualify to invest in this offering, the client must meet specific financial criteria. Which of the following best describes the client's status required for such an investment?
- AA sophisticated investor.
- BAn accredited investor.
- CA qualified institutional buyer (QIB).
- DA non-affiliated investor.
Show answer & explanationAnswer & explanation
Correct answer: B. An accredited investor.
Regulation D offerings, which are private placements exempt from SEC registration, typically require investors to be 'accredited investors.' This status is defined by specific income or net worth thresholds to ensure investors can bear the risks of less liquid and less transparent investments.
Why the other options are wrong
- A. A sophisticated investor is a qualitative term that can be part of the accredited investor definition but is not the overarching legal designation itself.
- C. A Qualified Institutional Buyer (QIB) has much higher asset thresholds and is typically an institution, not an individual.
- D. Non-affiliated investor is not a specific legal term for qualifying for private placements; it simply means not connected to the issuer.
Accredited Investor
An individual or entity that is allowed to invest in unregistered securities offerings, such as private placements, due to meeting specific financial criteria (income or net worth) as defined by the SEC.
- Individual income: $200,000+ ($300,000+ for joint income) for the past two years, with expectation to continue.
- Individual net worth: $1 million+ (excluding primary residence).
- Assumed to be financially sophisticated enough to understand and bear the risks of unregistered offerings.
Memory trick: Accredited: Access private, high-net-worth club.