For anyone new to the world of investing, it is important to educate yourself about the differences between being an accredited and non-accredited investor.
People or businesses that legally buy and sell securities without having to register with financial regulators are considered accredited investors. They must meet notable requirements in income, net worth, professional experience, or asset status. These investors range from wealthy individuals to banks and Wall Street brokers.
At present, the Securities and Exchange Commission’s threshold for an individual accredited investor is a net worth in excess of $1 million, not including primary residence, or annual income exceeding $200,000 ($300,000 if married and including a spouse’s income).
The general gist is this: Accredited investors are deemed by the SEC to be sophisticated investors, largely because of financial strength, who can effectively manage their investments without SEC protections.
For businesses to be considered accredited, the SEC requires that they have more than $5 million in assets or that their equity owners be individually accredited.
A non-accredited investor, in contrast, is anyone who does not meet the higher income requirements established by the SEC. These investors account for the lion’s share of people who deal in stocks and bonds.
The SEC was established in the aftermath of the 1929 stock-market crash – the meltdown that precipitated the Great Depression – to protect everyday Americans from making investments that are beyond their means or that require extensive professional expertise or knowledge to fully understand.
The SEC has established rules that limit the types of investment vehicles in which non-accredited investors can put their money, as well as regulations that spell out what documentation the managers of those investments must provide to adequately inform retail investors before accepting their money.
Mutual funds, for example, must pay close attention to these rules because they represent large numbers of non-accredited investors. Hedge funds, on the other hand, mostly deal with accredited investors and therefore have different compliance concerns.
Importantly, the SEC does not bestow official certification upon accredited investors. Rather, it is the responsibility of entities selling securities to confirm that investors meet the requirements for accredited status.
Bottom line, it is important for non-accredited investors to keep in mind that investing limits exist to protect them from undue risks. By extension, accredited investors with greater financial resilience to absorb losses are entrusted to assess and take on more investment risk, filling a market need for investments in entrepreneurial ventures.
*Nothing in this article should be considered legal or investment advice. Startup investments are always inherently risky and following the advice in this article will not necessarily reduce that risk.