What Is an Accredited Investor?
An accredited investor is a person or organization recognized by the SEC as financially sophisticated enough to buy and sell unregistered securities and other complex financial instruments that typical investors do not have access to.
Examples of such investments include hedge funds, structured investments, and private equity offerings from startups. These sorts of investment vehicles are not regulated to the degree that publicly traded stocks, bonds, and other traditional securities are, so the SEC restricts them to a particular class of investor that—in theory—requires fewer protections than the layman investor.
To become an accredited investor, an individual must meet certain income, net worth, or professional requirements. Businesses, non-profits, and other entities must also meet certain requirements to qualify as accredited.
What Can Accredited Investors Do That Ordinary Investors Can’t?
By becoming accredited, investors gain access to certain securities that offer more potential upside—and much higher risk—than those available to the rest of the market. Three common examples include hedge funds, private/commercial real estate, and startups that offer private equity.
Hedge Funds
Hedge funds are similar to mutual funds in that they involve a fund manager pooling client money to invest in a professionally curated portfolio of securities. Unlike most mutual funds, however, hedge funds make use of advanced trading techniques like short selling, hedging, and using leverage to increase returns. Because of this, they are much riskier than mutual funds and typically charge much higher fees.
Private and Commercial Real Estate
Ordinary investors can buy real estate, but they cannot typically invest in commercial or private real estate projects or funds. Accredited investors can invest in these sorts of projects directly or via REITsThe that allow them exposure to income-generating private and commercial properties.
Startups (Angel Investing)
When early-stage startups that aren’t publicly traded need to secure venture capital, they look to “angel investors,” which are accredited investors interested in buying private equity in unproven-but-promising businesses in the hope that they will grow, become successful, and generate large returns.
Why Is Accreditation Required to Invest in Certain Securities?
The SEC restricts trading in the securities described above (among others) to accredited investors for two main reasons.
First, since most of these investment vehicles carry quite a bit of risk, the SEC wants those who invest in them to have a high enough net worth to support the potentially substantial losses they might incur. Second, the SEC wants to make sure that anyone who dabbles in the more complex financial instruments available to accredited investors has enough financial education and experience to do so confidently.
What Are the Requirements to Be an Accredited Investor?
To be considered an accredited investor, an individual or entity must meet one or more of the financial or professional standards outlined by the SEC.
What Types of People Can Be Accredited Investors?
In order to qualify as an accredited investor, an individual must . . .
- Have a net worth of $1 million or more (excluding value of primary residence);
- Have an annual income of $200,000 or more ($300,000 or more for coupled) for the past two years with the same expected income for the current year;
- Be an investment professional with a Series 7, Series 64, or Series 82 license;
- Be an executive or partner in a company selling unregistered securities,;
- Be a “family client” of a “family office” that qualifies as an accredited investor; or
- Be a knowledgeable employee of a private fund.
What Types of Organizations Can Be Accredited Investors?
In order to qualify as an accredited investor, an entity must . . .
- Hold investments exceeding $5 million;
- Be a corporation, partnership, LLC, trust, 501(c)(3) nonprofit organization, employee benefit plan, or “family office” with assets exceeding $5 million;
- Be an entity wherein all equity holders are accredited investors;
- Be an investment advisor (SEC-registered, state-registered, or exempt) or SEC-registered broker-dealer; or
- Be a bank, savings and loan association, insurance company, registered investment company, business development company, small business investment company, or rural business investment company.
