Investors: accredited, institutional and retail

Three labels, different questions

Retail and institutional describe investors' roles. A retail investor commonly invests personal funds for personal goals. Institutional investors include banks, insurance companies, pension funds, and investment companies investing organizational or pooled assets. Accredited investor is a legal eligibility category that can include individuals and entities. These labels overlap: an individual can be both retail and accredited.

Accredited investors

Under Regulation D, an individual can qualify through income exceeding $200,000 in each of the two most recent years, with a reasonable expectation of reaching that income level in the current year. The joint threshold with a spouse or spousal equivalent is income exceeding $300,000 in each of those years, with the same current-year expectation. A single strong year is insufficient for this route.

Another route is individual or joint net worth exceeding $1 million. The primary residence is excluded as an asset. Mortgage debt up to the residence's fair market value is generally excluded as a liability, but excess debt counts. A non-acquisition increase in home-secured debt during the preceding 60 days also counts. Joint net worth can include separately held assets; the securities need not be purchased jointly.

A person holding an SEC-designated qualifying professional credential in good standing can qualify through that route. Not every credential qualifies. Directors, executive officers, and general partners of the issuer also have a role-based route for that issuer's offering.

Entity routes differ. Banks and registered broker-dealers are among the listed institutions. A corporation, partnership, or limited liability company can qualify with assets exceeding $5 million if it was not formed specifically to acquire the offered securities. A trust using its asset-based route also needs more than $5 million, must not be formed for that purchase, and must have a sophisticated person direct the purchase. An entity whose equity owners are all accredited investors has a separate route. These are alternatives, not cumulative requirements.

Qualified institutional buyers

A qualified institutional buyer, or QIB, is a separate Rule 144A category used for certain private resales. For many eligible institutions, the test is at least $100 million in securities of unaffiliated issuers owned and invested on a discretionary basis. Total assets are not interchangeable with qualifying securities. Special categories apply: a registered dealer has a $10 million route, while a bank's route also requires at least $25 million in audited net worth. Personal wealth alone does not make an individual a QIB.

Accreditation and QIB status address transaction eligibility; neither eliminates investment risk or the application of antifraud law.