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What Is an Accredited Investor?

What Is an Accredited Investor?

What Is An Accredited Investor

accredited investor

What is an accredited investor?

An accredited investor is a person or legal entity with a special status under financial laws, who is allowed to participate in non-registered investments, since being considered an individual with the experience and means to participate in riskier investments and bear any potential losses.

The Securities and Exchange Commission (SEC) concedes companies and private funds the opportunity to not register certain investments as long as the firms sell these assets to accredited investors exclusively.

Who Is an Accredited Investor? 

In order to qualify as an accredited investor, a person must meet certain criteria involving his annual income and net worth.

  • Annual Income: The investor must have an annual income that exceeds $200,000 or $300,000 for joint incomes, for the last two years. The individual must also expect the same or higher revenue in the current financial year.

 

  • Net worth: The investor must have a net worth of $1 million or higher, either as an individual or jointly if married, at the time of purchase.  In the case of an entity, assets must be valued at $5 million or higher or have an owner who is considered an accredited investor.

However, entities formed for the sole purpose of purchasing unregistered securities will not be allowed accredited status. 

 

How do I become an accredited investor?

There’s no formal process of certification offered to prove you’re an accredited investor. There is no government agency to review an investor’s credentials, and no exam or certification exists stating that a person has become an accredited investor. Instead, it is on the companies selling the non-registered investments to verify the qualifications of the buyers. 

Typically, the investor is required to fill out a questionnaire that requires details of their annual income and their net worth attaching supporting documents like financial statements, account information and tax return. It is possible some companies require additional information, like letters from financial advisors and attorneys or credit reports.

 

Why do accredited investors exist?

The Securities and Exchange Commission (SEC) created this distinction to refer to individuals considered “sophisticated investors”, who are not in need of the same levels of financial protections the common investor does. 

Allowing only accredited investors to participate in offerings of non-registered securities has the purpose of:

  • Regulating companies against advertising to or soliciting investments from non-accredited investors.

 

  • Protecting the regular investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss

 

  • Making sure that those who meet the qualifications have the financial sophistication necessary to evaluate a private investment and potentially riskier opportunity 

 

  • Assuring that the risk of losing their investment falls on those who financially prepared to bear the situation.

Amendment to the Accredited Investor Definition

The SEC announced the adoption of amendments to the definition of “accredited investor,”. In efforts to “simplify, harmonize, and improve” the rules governing the private offering of securities while maintaining investor protections by adding new categories of qualifications, including

  • Individuals with professional certifications, designations or credentials issued by an accredited educational institution, which the SEC may designate from time to time; 

 

  •  Individuals who are “knowledgeable employees” of private funds;

 

  • Limited liability companies (LLCs) with $5 million in assets;

 

  • Entities, such as Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries, that own investments, in excess of $5 million

 

  • Family offices with at least $5 million in assets under management and their family clients; and

 

  • Spousals may pool their finances for the purpose of qualifying as accredited investors, describe as “spousal equivalent”

Here is the full text of the amendment  

The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.

The amendments to the accredited investor definition in Rule 501(a):

add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.  This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.  Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;

include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;

clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;

add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;

add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and

add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendment to Rule 215 replaces the existing definition with a cross-reference to the definition in Rule 501(a).

These amendments were announced on August 26, 2020, and they will take effect 60 days after publication in the Federal Register. 

If you are interested, here you can find SEC’s official Press release And if you have any questions about how accredited investors work, do not hesitate to contact us

 

Thomas Howard

Thomas Howard

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Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

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    Victory for Hemp

    Victory for Hemp

    Hemp Ban Overturned

    Hemp is completely legal to grow in Illinois with the proper state license.

    Illinois Hemp Ban Overturned in Rural Oakland

    The City of Oakland tried to ban hemp farming inside its city limits by claiming authority under the Illinois Municipal Code section regarding Urban Agricultural Areas. Collateral Base represented the prejudiced farmer and had the municipal ordinance tossed by an Illinois Court. Because the City of Oakland is not a home rule community Dillion’s Rule in Illinois barred the City from banning hemp due to its lack of authority. 

    Let’s touch on what is a “home rule” or “non-home rule” municipality in Illinois. 39 States follow “Dillion’s Rule” – including Illinois – and it allows municipalities to allow themselves to govern their community with greater detail than the state law applies, but first they must become a “home rule” unit of government.

    Q: What is “home rule,” why would a community want to become a home rule unit, and how?

    A: In Illinois, home rule is the State constitutional authority of local governments to override the state and self-govern provided the General Assembly did not explicitly limit that power or maintain the exclusive exercise of authority in a specific area, for example the CRTA limited home rule communities from banning home grow cannabis for medical marijuana patients.

    Home rule municipalities explicitly have police powers.  Article 7 of the Illinois Constitution regarding home rule provides that they “may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt” without specific statutory authority.

     

    Hemp Questions?

    How home rule is different than non-home rule

    Non-home rule basically bows to the state laws, unless the municipality has a statute or enumerated constitutional powers that enable it to create new ordinances. However, a home rule municipality can go beyond state regulations unless expressly pre-empted by statute and can rely on its police powers.  Here we will examine the differences between the language from the Illinois Constitution on home rule units. 

    The City of Oakland went beyond its non-home rule powers when making its hemp farming ban.

    Ill. Const. Art. 7, § 7 for Non-home Rule Municipalities

    1. to make local improvements by special assessment and to exercise this power jointly with other counties and municipalities, and other classes of units of local government having that power on the effective date of this Constitution unless that power is subsequently denied by law to any such other units of local government;
    2.  by referendum, to adopt, alter or repeal their forms of government provided by law;
    3.  in the case of municipalities, to provide by referendum for their officers, manner of selection and terms of office;
    4.  in the case of counties, to provide for their officers, manner of selection and terms of office as provided in Section 4 of this Article;
    5.  to incur debt except as limited by law and except that debt payable from ad valorem property tax receipts shall mature within 40 years from the time it is incurred; and
    6. to levy or impose additional taxes upon areas within their boundaries in the manner provided by law for the provision of special services to those areas and for the payment of debt incurred in order to provide those special services.

    These are the only powers a non-home rule municipality in Illinois may have – so the City of Oakland had to try and find another statute that enabled them to ban hemp farming throughout its city limits.  We will get to that soon, but we note that the City of Oakland then argued that the statutory authority did not matter because they could ban hemp under its police powers – but non-home rule municipalities do NOT have police powers.  As you can see from the powers of the Home Rule Units under Section 6 of  Article 7 of the Illinois Constitution below.

    SECTION 6. POWERS OF HOME RULE UNITS

    (a) A County which has a chief executive officer elected by the electors of the county and any municipality which has a population of more than 25,000 are home rule units. Other municipalities may elect by referendum to become home rule units. Except as limited by this Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt.

    We put the police powers in bold.

    What are Police Powers in Illinois?

    They are: the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt.

    Urban Agricultural Areas in Illinois

    The City of Oakland went to the Illinois Municipal Code and found a restriction against urban agricultural areas that a city can regulate if it bears a direct relationship with the public health, safety or welfare.

    The only problem was – this law did not exist until 2019 and Oakland had no urban agricultural area. The City of Oakland tried to find any method they could to ban the hemp farming inside its city limits.  The City argued that its zoning laws from 1968 qualified as an urban agricultural area.  This is not how law works, as statutes do not operate retroactively.

    Division 15.4 of the Illinois Municipal Code, titled Municipal Urban Agricultural Areas

    The cited statute, 65 ILCS 5/11.4-30(a,) provides in full:

    (a) A municipality may not exercise any of its powers to enact ordinances within an urban agricultural area in a manner that would unreasonably restrict or regulate farming practices in contravention of the purposes of this Act unless the restrictions or regulations bear a direct relationship to public health or safety. (Emphasis Added).

    The City of Oakland skipped over all the regulatory hurdles to get to its objective of banning hemp.  Illinois amended the Illinois Municipal Code in 2019 to provide for urban agriculture and provided protections and procedures for farmers to establish an “urban agricultural area.” We must review Article 11, Division 15.4 of the Code regarding Municipal Urban Agricultural Areas. The City looked straight past the controlling provisions of the Code in search of its desired ends – banning hemp farming in its City limits. The City skipped right over numerous Sections of the Code that requires prior to adopting an ordinance designating an urban agricultural area, the municipality must:

    1.  receive an application for establishing an urban agricultural area [65 ILCS 5/11-15.4-15(a)]; 
    2. establish an urban agricultural area committee after receiving an application to so establish one [65 ILCS 5/11-15.4-10(a); 
    3. elect a chair for that committee [65 ILCS 5/11-15.4-10(b)]; 
    4. fix a time and place for a public hearing and notify each taxing unit of local government [65 ILCS 5/11-15.4-20]; 
    5. publish notice of this hearing in a newspaper of general circulation for days before such hearing [65 ILCS 5/11-15.4-20]; and 
    6. hold the public hearing; allow any interested person – like the Plaintiffs in this case – to appear and voice objections and comments with respect to the hearing [65 ILCS 5/11-15.4-20].
    7. Only after such public hearing, and in compliance with the procedures as provided in the Code, may the municipality adopt an ordinance establishing and designating an urban agricultural area [65 ILCS 5/11-15.4-20].

    The City of Oakland did none of these things in banning hemp farming from its City limits. Instead, it just said that it did, which the court pointed out that it clearly did not and had no ‘urban agricultural area’ to regulate. Therefore, the City’s ban on hemp failed under judicial review.  The City of Oakland may try to appeal the decision, but that won’t fix the problems with its hemp ban. 

    Illinois hemp bans may not be possible in home rule municipalities either because of the State’s comprehensive hemp licensing program, but that issue remains for another day.  

    Thomas Howard

    Thomas Howard

    Cannabis Lawyer

    Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

    Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
    R. Martindale

    Need A Business Lawyer?

    Call our law offices with your legal questions for help on:

    1. real estate contracts
    2. business contract disputes
    3. Shareholder litigation
    4. cannabis business
    5. fraud actions
    6. mechanic's liens

     

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      Banking For Cannabis Companies in Illinois

      Banking For Cannabis Companies in Illinois

      Banking For Cannabis Companies in Illinois

      Cannabis companies are notoriously tricky clients for banks and credit unions. An innovative program in Illinois hopes to fix that.

      cannabis banking consulting

      Cannabis is a classic example of an “underbanked” industry. The tangled and contradictory web of state and federal laws have convinced many banks that cannabis simply isn’t worth the trouble. Illinois hopes to fix that.

      We’ve written many times before about the problems facing cannabis businesses as they try to get access to basic banking and payment processing services. Over the past couple of years, there has been a surge of legislative effort to try and help the chronically underbanked cannabis industry. Unfortunately, many of these efforts are being stymied by the ongoing COVID-19 crisis as states and Congress effectively grind to a halt.

      Nevertheless, many states are still undertaking innovative programs to help their burgeoning cannabis companies get access to financial services. In this particular article, we’re going to look at the current state of cannabis banking, and look at one particularly promising initiative out of Illinois.

      Cannabis and Banking: A Brief History

      The first major crack in federal marijuana prohibition came in 2013 from the Obama Administration. Deputy Attorney General James Cole put out a memorandum entitled “Guidance Regarding Marijuana Enforcement”, known more commonly as the Cole Memorandum. Essentially, the Cole Memo set a policy at the Department of Justice to deprioritize enforcement of the Controlled Substances Act (CSA) in states which had legalized marijuana. The Cole Memo was rescinded in 2018 by then-Attorney General Jeff Sessions. However, the one-page memo from Attorney General Sessions effectively left CSA enforcement to the discretion of local prosecutors. As we’ve seen in Illinois, local federal prosecutors don’t seem to have any particular interest in enforcing the CSA in the face of a booming cannabis industry.

       

      Shortly after the Cole Memo, the Federal Crimes Enforcement Network (FinCEN) issued guidance to financial institutions regarding their obligations under the Bank Secrecy Act (BSA). The FinCEN guidance notes that, due to the CSA, financial institutions are still required to file suspicious activity reports (SARs) when dealing with cannabis businesses. FinCEN creates three categories of SARs for financial institutions dealing with cannabis businesses: (1) “marijuana limited” SARs with limited information for otherwise legitimate banking clients; (2) “marijuana priority” SARs, for banking clients which implicate the Cole Memo concerns like non-cannabis crime, and; (3) “marijuana termination” SARs, where there’s clear criminal activity like money laundering. Cannabis clients operating legitimate businesses in legal markets, such as dispensaries and growers in Illinois, are likely to fall into the “marijuana limited” category. This is essentially a way for banks to comply with the BSA, while telling FinCEN that the client isn’t a priority.

      Recent Developments in Cannabis Banking

      cannabis banking consultingDespite the support provided by the Cole Memo and FinCEN, many banks are understandably extremely reluctant to enter into the cannabis market. After all, these documents are merely guidance memos, subject to the political winds of the day. As a result, there have been several major legislative efforts on behalf of the underbanked cannabis industry.

      At the federal level, there is the “SAFE Banking Act”, which we’ve covered here in much greater detail. Essentially, the bill provides a safe harbor for credit unions and private banks to get a limited-purpose state charter to allow them to provide services to state-legal cannabis businesses. The SAFE Banking Act was introduced by Congressman Ed Perlmutter (D-CO) and co-sponsored by a bipartisan group of Congressmen. The bill passed the House of Representatives last September by a bipartisan 321-103 vote. It still has to make it through the Senate, where it has 33 co-sponsors including five Republican Senators. Of course, between the upcoming Presidential election and the COVID-19 near-shutdown of Congress, the SAFE Banking Act is unlikely to become law this year.

      At the state level, there are some encouraging developments. In Colorado, Governor Polis unveiled his administration’s “Roadmap to Cannabis Banking & Financial Services.” Unfortunately, the Roadmap is little more than a series of goals and vague plans, with concrete policies to follow at some later date. California has provided some more robust guidance to help financial institutions develop the appropriate compliance protocols. Illinois has had some legislative proposals, which we have discussed elsewhere.

      SUPPORT FOR CANNABIS IN ILLINOIS

      The one major bright spot in Illinois is the “Community Invest Cannabis Banking Services” initiative put out by the Illinois State Treasurer. The idea behind Community Invest is fairly straightforward. The program provides investment capital at a reduced rate to qualified financial institutions so they can expand services to cannabis-related businesses. The capital comes in the form of two-year term deposits, with a variable monthly rate based on Federal Overnight Excess Funds. The application process is also fairly simple:

      1. Step 1:  Become an Approved Program Depository: depending on the total deposits and collateral pledged by the bank, there are different application forms. The applications focus on financial disclosures by the applicant so that they can get on the list of approved institutions to participate in the Treasurer’s Community Development Link Deposit and Access to Capital Programs. To get a better idea of the institutions involved, a full list of approved depositories is available here.

       

      1. Step 2: Review Eligibility and Submit Application: applicants need to fill out the form and provide a host of detailed information, including a business plan with information like risk assessment and mitigation strategies.

      Unfortunately, the Illinois State Treasurer seemingly has not done much to promote this program. The State of Illinois has a robust opportunities for institutions looking to invest in historically underserved communities. Indeed, the Cannabis Regulation and Tax Act places special emphasis on “social equity” and Disproportionately Impacted Communities, or DIAs. The state will be announcing the winners of the most recent round of dispensary applications next month, so the need for cannabis banking services is about to increase tremendously in Illinois. Banks and other financial institutions would be wise to take a look options for serving cannabis businesses sooner rather than later.

      David Silvers

      David Silvers

      Regulatory Lawyer

      Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

      Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
      R. Martindale

      Need A Business Lawyer?

      Call our law offices with your legal questions for help on:

      1. real estate contracts
      2. business contract disputes
      3. Shareholder litigation
      4. cannabis business
      5. fraud actions
      6. mechanic's liens

       

        REACH US BY EMAIL