Accredited Investors and Initial Coin Offerings

The U.S. Securities and Exchange Commission sets certain standards that individuals and entities must meet before they can become accredited investors. But what exactly is an accredited investor and how do they factor into the world of cryptocurrency?

The SEC Defines Accredited Investors

In Rule 501 of Regulation D of the Securities Act of 1933, the Securities and Exchange Commission outlines the conditions that people or entities must meet to be considered an accredited investor. These conditions exist because in the wake of the 1929 stock market crash and the resulting Great Depression, the SEC needed a method to distinguish those entities with a certain amount of risk tolerance who can protect their own interests in potentially high risk investments.

An accredited investor can include a financial institution like a bank, non-profits or private business development companies that meet the threshold of total assets. Individuals can also become accredited investors if their net worth exceeds a certain threshold. Those with a trust that contains certain assets can also meet the accredited investor criteria. By meeting these standards, accredited investors have essentially been vetted as verifiably qualified to invest in certain offering types.  Definitions vary by country, with the US setting out the following qualifications for individual accredited investors:

An accredited investor, in the context of a natural person, includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years.

Accredited Investors and Cryptocurrency

In the financial world, companies can to raise money from investors by selling securities using a number of different “offering” types defined by the SEC. These offering types prescribe the registration and disclosure requirements, the maximum amount of money which can be raised, and the types of investors which are eligible to participate.

In the realm of cryptocurrency, accredited investors and offering types are important when structuring an Initial Coin Offering (ICO) or other type of token sale. At this point in time, most ICOs either limit the opportunities to invest to accredited investors, or ban US investors altogether in an attempt to comply with (or avoid being subject to) US securities regulations.  While debates rage within the cryptocurrency community about these regulations, it is clear that the SEC views most ICOs and token offerings as sales of securities.  Even though the rules may seem unfair or exclusionary to people who want to get involved in ICOs, failure to comply with regulations can have a negative impact on projects and their future token values if they come under investigation.

Why Accredited Investors are Interested

Accredited investors are willing to take financial risks to get gains, and even though cryptocurrency is unpredictable and volatile, there is the potential of extremely high returns on that investment. Another attractive feature is that the accredited investor can quickly and easily support a startup company. With just a digital currency wallet, investors have the option to get involved in as many different projects as they want. Accredited investors can also easily offload tokens and coins fairly quickly.

ICOs and Accredited Investors Need Each Other

There’s no doubt that ICOs are a new and innovative method for startup companies to raise funds. The efficiency, speed and global reach are undeniably attractive to accredited investors and blockchain companies. The relationship between accredited investors and cryptocurrency is sure to evolve as improved technology, security issues, incredible returns as well as massive losses and outside regulatory requirements continue to shape the future.

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