Becoming an accredited investor

[Carl Fredrickson]

I'm still a while off from needing these answers, but out of curiosity...

How stringent is the $1million net worth requirement to become an accredited investor? Is it to the penny, or is it more of a rounding thing (so $995,000 is close enough)?

How much detail do you provide when under review?

Once you've been accredited, does the company you're investing with monitor to see that you continue to meet the requirements? For instance, if you had the million, invested some of it in the deal that required accreditation, and then the stock market fell or you put some of the remainder into a primary residence, so that you no longer meet the net worth requirement, does some alarm go off and they suddenly hand you your money back and show you the door? Or do they say the million was there at the time of investment so it's OK to stay?

[Ian Ippolito]

@Carl Fredrickson, Levi T. has it mostly right, but not entirely.

There are indeed two types of accreditation that sponsors do. One of them essentially relies on the honor system asking only the most basic of questions (and a nonaccredited person can easily game the system). The other involves much more rigorous verification (usually requiring you to send in your bank account statements, etc. or have something written from a financial planner or accountant). 

However, sponsors don't get to choose which of the two they do: the law and the SEC dictates the answer. There are two ways that a sponsor can choose to market their offering: 506B and 506C.

506C has the most flexible marketing, allowing them to market to the general public. However, if they do this, then they have to do the rigorous verification, because the SEC requires them to take "reasonable steps" to verify that someone is accredited or not.  So if you are not yet over the threshold of being an accredited investor, it's probably a waste of your time to analyze the PPM, and do all the other due diligence, because they will most likely be forced to reject you at that point.

On the other hand, 506B requires them to limit their marketing to people they have a "substantial prior relationship"  with. In this case, they can use the self accreditation/honor system method. So if you are not over the threshold, you "could" target these types of investments. 

PS: I'm using the word "could" in quotes because I'm not recommending doing this at all. What I would recommend is wait until you have enough money to fully qualify as an accredited investor, so then you don't have to worry about it.