Non-Accredited Investor

Meridian Kilns is selling stock in reliance on Rule 506(b). It has sold to 80 accredited investors and to 37 individuals who are not accredited but are financially sophisticated. Four of those 37 are relatives of another purchaser and share that purchaser's primary residence. Has the issuer exceeded the Rule 506(b) purchaser limit?

1. A.Yes. The 117 purchasers in the offering are far above the ceiling of 35.Wrong. Accredited investors are excluded from the purchaser count altogether, so the 80 of them never enter the total.
2. B.Yes. Thirty-seven non-accredited purchasers is two more than the ceiling permits.Wrong. It counts every non-accredited buyer, ignoring the exclusion for relatives who share another purchaser's primary residence.
3. C.No. Excluding accredited investors and household relatives leaves 33 counted purchasers.Correct. Rule 501(e) strips out both categories, and 33 is inside the 35 ceiling.
4. D.No. The ceiling reaches only purchasers who are unsophisticated, and all 37 are sophisticated.Wrong. Sophistication is a condition on who may buy, not a rule that removes anyone from the 35-purchaser count.

Why: Rule 506(b) limits the offering to no more than 35 purchasers in any 90-calendar-day period, but Rule 501(e) removes whole categories from the count: every accredited investor, and any relative or spouse of a purchaser who shares that purchaser's primary residence. Here the 80 accredited buyers drop out entirely and the four household relatives drop out as well, leaving 33 counted purchasers, which is inside the ceiling. Sophistication is a separate condition rather than a counting rule, so satisfying it changes nothing about the arithmetic. Had five more unrelated non-accredited investors bought in the same window, the count would reach 38 and the exemption would fail.

In a Tier 2 Regulation A offering not listed on a national exchange, does an accredited investor face the same income- or net-worth-based investment limit that applies to non-accredited investors in that offering?

1. A.Yes, the investment limit applies uniformly to every investor in a Tier 2 offering not listed on an exchange, regardless of accredited status.Wrong. The limit is specifically targeted at non-accredited investors, not a blanket cap.
2. B.No, but only because accredited investors are prohibited from purchasing in Tier 2 offerings entirely, so the question of a limit never arises for them.Wrong. Accredited investors are not prohibited from participating in Tier 2 offerings.
3. C.Yes, but only for accredited investors whose accreditation is based on net worth rather than income, since income-based accredited investors remain subject to the cap.Wrong. There is no such split treatment among different bases for accreditation.
4. D.No -- the non-accredited investor investment limit does not apply to accredited investors purchasing in the same Tier 2 offering.Correct. The limit specifically protects non-accredited purchasers.

Why: No. Tier 2's investment limit for non-accredited investors does not apply to accredited investors purchasing in the same offering. An accredited investor may generally invest without being subject to that specific percentage-of-income-or-net-worth ceiling, reflecting the general regulatory premise that accredited investors need less of this particular protection.

A prospective subscriber to a Rule 506(b) offering is not accredited and, without help, does not have sufficient knowledge and experience in financial matters to evaluate the merits and risks of the investment. Under Rule 506(b), what must be true before she may still be permitted to purchase?

1. A.Nothing further — non-accredited investors may never purchase in a Rule 506(b) offering under any circumstanceWrong. Non-accredited investors are permitted in a Rule 506(b) offering if the sophistication condition is satisfied.
2. B.She must become accredited before purchasing, since sophistication alone is never sufficient for a non-accredited investorWrong. This inverts the rule; sophistication, alone or with a purchaser representative, is precisely the path available to a non-accredited investor.
3. C.She must have a purchaser representative such that she, together with that representative, satisfies the sophistication requirementCorrect. Rule 506(b) allows sophistication to be met by the investor alone or jointly with a purchaser representative.
4. D.The issuer must convert the offering to a Rule 506(c) offering to accept herWrong. Converting exemptions does not resolve this investor's sophistication question and is an unrelated fix.

Why: She must have a purchaser representative such that she, together with that representative, satisfies the sophistication requirement — Rule 506(b) allows sophistication to be established either by the investor alone or jointly with a purchaser representative. Non-accredited investors are not automatically barred from a Rule 506(b) offering; they are permitted if this sophistication condition, evaluated with or without a purchaser representative, is met.

A non-accredited investor wants to invest in a Regulation A Tier 2 offering. Separately, a non-accredited but sophisticated investor wants to invest in a Rule 506(b) offering. Does either investor face a regulatory limit on how much they personally may invest, based on their income or net worth?

1. A.Neither investor faces any investment limit under either regulation, since investment limits are exclusively a feature of crowdfunding offerings.Wrong. This denies Regulation A Tier 2's actual investment-limit feature for non-accredited investors.
2. B.Both investors face an identical income- or net-worth-based investment limit, since Regulation A and Regulation D apply the same non-accredited investor protections.Wrong. Regulation D's protections for a non-accredited 506(b) purchaser do not include this specific type of investment cap.
3. C.Only the Rule 506(b) investor faces an income- or net-worth-based investment limit, while Regulation A Tier 2 investors face no such limit regardless of accreditation status.Wrong. This reverses which regime actually includes this specific protection.
4. D.The Regulation A Tier 2 investor faces an income- or net-worth-based investment limit as a structural protection; the Rule 506(b) investor does not face an analogous cap.Correct. This is the accurate contrast between the two regimes' non-accredited investor protections.

Why: The Regulation A Tier 2 investor is subject to an investor-level investment limit tied to income or net worth for non-accredited investors, a specific protection built into Tier 2's structure. Regulation D's Rule 506(b) does not impose an analogous income- or net-worth-based investment cap on the individual non-accredited purchaser, though other protections, like the limited number of such purchasers and required disclosure, apply instead.