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Wednesday, September 19, 2018

Securities Laws Can Derail Your Estate Plan

Securities Laws Can Derail Your Estate Plan

It’s not uncommon for high-net-worth individuals to hold their assets in trusts, family limited partnerships or charitable foundation. If the assets held in this manner include interests in hedge funds or other “unregistered” securities, it’s important to ensure that the entity is qualified to hold such investments. Exemptions under federal securities laws require that investors in private funds and other unregistered securities qualify as “accredited investors” or “qualified purchasers.”

Learn the exemptions

Generally, companies or funds that offer securities for sale are subject to burdensome (and costly) registration and reporting requirements under the Securities Act of 1933, unless they fall within one of several exemptions. Perhaps the most common exemption is Rule 506(b) of Regulation D, which exempts sales of securities to an unlimited number of accredited investors plus up to 35 nonaccredited, “sophisticated” investors.

Private investment funds also typically rely on two exemptions from registration under the Investment Company Act of 1940. These exemptions allow a fund to avoid registration if 1) it limits the fund to no more than 100 investors, or 2), if there are more than 100 investors, it allows only qualified purchasers to invest.

Accredited investors

Accredited investors include financial institutions and other entities that meet certain requirements, as well as certain officers, directors and other insiders of the entity whose securities are being offered. They also include individuals with either 1) a net worth of at least $1 million (excluding their primary residence), or 2) income of at least $200,000 ($300,000 for married couples) in each of the preceding two years, and with a reasonable expectation of meeting the requirements in the current year.

A trust (including a foundation organized as a trust) can qualify as an accredited investor in one of three ways:

  1. Its assets are greater than $5 million, it wasn’t formed for the specific purpose of acquiring the securities in question and a sophisticated person directs its investments.
  2. A national bank or other qualifying financial institution serves as trustee.
  3. The trust is revocable and the grantor qualifies as an accredited investor individually.

Family investment vehicles are accredited investors if their assets exceed $5 million and they weren’t formed for the specific purpose of making the investment in question. Alternatively, they can qualify as accredited if all of their equity owners are accredited. Generally, a foundation not organized as a trust is accredited only if its assets exceed $5 million.

Qualified purchasers

Individuals are qualified purchasers if they have at least $5 million in investments. Other qualified purchasers include:

  • An entity that has at least $5 million in investments, with all of its beneficiaries being either closely related family members (siblings, current or former spouses, or direct lineal descendants); estates, foundations, or charitable organizations of such family members; or trusts created by or for the benefit of the family member described,
  • A trust that doesn’t meet the family exception above, so long as the trust wasn’t established solely for the purpose of making the investment, and every individual associated with the trust as either creator, contributor or investment decision-maker is considered a qualified investor, or
  • An entity with not less than $25 million in investments.

Review your plan

When determining whether a family entity is an accredited investor or a qualified purchaser, turn to your advisor. There’s a lot of nuance in the definitions, and the information provided here is intended to be a guideline. Your specific circumstances could vary from the general rules.


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