A purchase of 100 shares on a phone app takes seconds, but about six separate businesses handle the order. Each has a legal job, a regulator and a duty to you. Exam questions keep asking which one does what.
A pension fund can hire its own analysts, and a first-time saver cannot. The rules therefore sort accredited, institutional and retail investors into categories. The category decides what each investor may buy and how firms must talk to them. Securities Act Rule 215 points to Regulation D Rule 501(a) for the definition.
Accredited investors. An accredited investor is presumed able to bear the risk of an unregistered private offering. For that reason, many Regulation D private placements are sold mainly or only to accredited investors. A buyer counts as accredited if it meets a test at the time of sale, or if the issuer reasonably believes it does. A natural person qualifies by meeting any one of these tests:
- Net worth: Net worth above $1 million, alone or jointly with a spouse or spousal equivalent, excluding the primary residence. A spousal equivalent is a cohabitant in a marriage-like relationship.
- Income: Income above $200,000, or above $300,000 jointly with a spouse or spousal equivalent, in each of the two most recent years.
Common mistakes
- Adding home equity to net worth. Maya's $920,000 would become $1,420,000 and wrongly pass. A net worth of exactly $1,000,000 also fails, because the test is "exceeds."
- Treating $100 million as the SEC requirement. $100 million only opens the choice. $110 million requires SEC registration, and $90 million is the exit point.
- Saying the introducing firm holds customer assets. In a fully disclosed arrangement, the clearing firm safeguards them and sends statements.
Bottom line
- Among other routes, a natural person is accredited under Rule 501(a) with net worth over $1 million excluding the primary residence, income over $200,000 ($300,000 joint) in each of the last two years with the same expected this year, or...
- FINRA Rule 4512(c) institutional accounts belong to banks, savings and loans, insurers, registered investment companies, registered advisers and anyone with at least $50 million in total assets.
- Rule 2210 treats anyone outside its institutional investor list, which adds governmental entities, large benefit plans and FINRA members, as a retail investor.
- A broker acts as agent for a commission and a dealer acts as principal for a markup or markdown, never both on one trade.
Exam shortcut
Read the stem for its verb, then match the participant. "Account of others" or "commission" means broker. "Own account" or "markup" means dealer. "Holds the assets" or "sends the statement" points to the clearing firm. For adviser registration, first check for a registered fund client, which means the SEC at any size. Then place AUM in its band.
The full lesson (about 3,956 words, 26 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- A2
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