Regulation D under the Securities Act defines accredited investors. Under this regulation, a number of different types of accredited investors are covered – these include individuals and specific types of entities such as business development companies, nonprofit corporations, banks, and trusts. Many times, individual investors keep their assets and investment accounts in a trust (revocable or irrevocable) for purposes of estate planning. It’s important to understand how trusts can qualify under the Reg D accredited investor definition.
Revocable
Provided that all the equity owners of a revocable trust are accredited investors themselves, the trust meets the definition of accredited investor.
If you create a revocable trust and have the power to revoke or amend that trust any time – and you are also an accredited investor under the net worth or income requirements – the revocable trust also qualifies as an accredited investor. This means your trust is permitted to invest in certain nonregistered securities offered by hedge funds, managed futures funds, venture capital funds, and private equity funds.
Irrevocable Trusts
One the other hand, irrevocable trusts are more difficult to verify as accredited investors. If the trust has total assets greater than $5 million, was not created for the specific purpose of investing in securities under consideration for purchase (and that purchase is being managed by a sophisticated investor), it meets the Reg D accredited investor definition. Other qualifying possibilities exist as well. The sophisticated investor has the experience and knowledge in business and financial matters (along with possibly his or her financial advisor) to be able to properly evaluate the advantages and risks of a prospective investment.
Trusts Qualifying as an Accredited Investor
These trusts must conform to the Reg D accredited investor definition specified in order to qualify as an accredited investor. However, there are other ways than what is discussed above to qualify as well.
If the trustee or co-trustee of the trust is an insurance company, business development company, bank, small business investment company, or registered investment company, that trust qualifies as an accredited investor.
