What Is a Non-Accredited Investor?
A non-accredited investor isany investorwho does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors.
An accredited investor can be a bank or a company but is mainly used to distinguish individuals who are considered financially knowledgeable enough to look after their own investing activities without SEC protection.
The current standard for an individual accredited investor is a net worth of more than $1 million excluding the value of their primary residence and an income of more than $200,000 annually (or $300,000 combined income with a spouse) for each of the past two years with the expectation of the same for the current year.
A non-accredited investor, therefore, is anyone making less than $200,000 annually (less than $300,000 including a spouse) that alsohas a total net worth of less than$1 million when their primary residence is excluded.
Key Takeaways
- A non-accredited investor is any investor who does not meet the income or net worth requirements of the Securities and Exchange Commission (SEC).
- Non-accredited investors are anyone who makes less than $200,000 annually ($300,000 including a spouse) with a total net worth of less than $1 million when their primary residence is excluded.
- The SEC regulates what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency.
Understanding Non-Accredited Investors
Non-accredited investors make up the bulk of investors in the world. When people speak of retail investors, they often mean non-accredited investors. Basically, this term covers everyone who holds less than $1 million in assets, aside from the value they may have in their house, and earns under $200,000,i.e., the vast majority of Americans. According to a 2023 report from the SEC, accredited investors made up 18% of households in 2022.
The SEC does have the ability to change the definition of accredited investor should inflation and other factors result in too much of the general population meeting the standard.
On Aug. 26, 2020, the U.S. Securities and Exchange Commission amended the definition of an accredited investor. According to the SEC's press release, "the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify."
Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisers.
Non-Accredited Investors and Private Companies
Non-accredited investors are limited in their investment choices for their own safety. After the speculation around the 1929 Crash and the resulting depression, the SEC was created to protect regular people from getting intoinvestments they couldn't afford or understand.
The SEC uses acts and regulations to set out what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency. Private funds, private companies, and hedge funds can do things with investor money that mutual funds cannot do simply because they deal primarily with accredited investors.
The SEC assumes that all parties involved know the risks and rewards involved, so they have a lighter regulatory touch where these funds are concerned.
That said, these funds must pay close attention to their compliance and make sure their investor counts stay within the rules becausethey can losetheir regulation status. For some types of private investment, they are only allowed non-accredited investors when they are employees or fit a specific exemption.
Other funds and companies can have unrelated non-accredited investors, but they must keep the number below a certain level. This is the case with Regulation D, which keeps the number of non-accredited investors in a private placement below 35.
What Is the Difference Between Accredited and Non-Accredited Investors?
The difference between accredited and non-accredited investors is determined by the SEC, which classifies investors into these two types of buckets based on net worth and salary.
Accredited investors must have a net worth of more than $1 million excluding the value of their primary residence and an income of more than $200,000 annually (or $300,000 combined income with a spouse) for each of the past two years with the same expected for the current year. Whoever does not meet these requirements is a non-accredited investor. Accredited investors are allowed to invest in securities that non-accredited investors are not.
Why Do Investors Need to Be Accredited?
Investors need to be accredited so that they can invest in riskier assets. The goal is really to protect non-accredited investors. It is assumed that accredited investors have enough financial expertise to analyze the risks and rewards of a riskier investment or at least have the wealth to absorb a significant loss.
How Can Non-Accredited Investors Invest in Private Companies?
Non-accredited investors can invest in private companies through equity crowdfunding. This is so because the amount needed to invest is usually very small as equity crowdfunding seeks to pool the investments from many investors.
The Bottom Line
The SEC's classification of investors into accredited and non-accredited is intended to protect investors who have lower net worths and salaries, and those who may not understand all types of investments; particularly riskier ones. Accredited investors may be able to take more risks simply because they have more money.
FAQs
A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors.
What is the difference between an accredited and non-accredited investor? ›
Essentially, accredited investors qualify to invest in Regulation D investments (see examples below), which doesn't preclude them from investing in SEC-registered opportunities. Non-accredited investors can only invest in SEC-registered assets.
What is the SEC definition of an accredited investor? ›
Financial Criteria
Net worth over $1 million, excluding primary residence (individually or with spouse or partner) Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.
What is the non-accredited investor rule? ›
Non-accredited investors are investors who fail to meet the net worth or income requirements determined by the SEC. The SEC protects non-accredited investors by applying restrictions on their investment choices; examples include hedge funds and private equities.
Do non US investors need to be accredited? ›
If a foreign investor is not an accredited investor, the company may still be able to issue securities to that investor under Regulation S. Regulation S requires, among other things, that the issuance of securities comply with the laws of the investor's country.
What is accredited vs non-accredited? ›
Bulletins - Accredited vs Unaccredited: What is the difference? An accredited course will have been developed to a set of regulated standards and will have received regulated approval. An unaccredited course will be developed by a company or individual without approval against regulated standards.
Which of the following is not an accredited investor? ›
If your individual income was below $200,000 (or $300,000 with a spouse), you are a non-accredited investor. Net Worth: Calculate your total assets (excluding your primary residence) and subtract your total liabilities. If the result is less than $1 million, you fall into the non-accredited category.
Who is an accredited investor under SEC Regulation D? ›
In the U.S., the term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings.
What is a qualified investor vs. accredited investor? ›
In terms of investment criteria, qualified purchasers are defined based on the value of their investments. In their turn, accredited investors are defined based on annual income and net worth. Qualified purchasers have broader investment opportunities than accredited investors.
Can a non-accredited investor invest in a startup? ›
Though non-accredited investors may invest, they are subject to investment limits based on the greater of annual income and net worth; The company must file a Form C, including two years of financial statements that are certified, reviewed or audited, as required, with the SEC.
The SEC in 2020 issued rules in Release No. 33-10824, Accredited Investor Definition, allowing investors holding certain professional licenses, such as a Series 7, to qualify as accredited, even if they fall short of meeting the income or asset tests.
Can you sell securities to non-accredited investors? ›
securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the ...
How do I prove I am an accredited investor? ›
There are 4 types of evidence that you can provide to prove that you are accredited to invest as a US individual.
- Income Evidence (this is generally the fastest method for verification) ...
- Net Worth Evidence. ...
- Professional License Certification. ...
- Third-Party Attestation Letters.
A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors.
What is an accredited investor for the SEC? ›
According to the Securities and Exchange Commission, an individual accredited investor is anyone who: Earned income of more than $200,000 (or $300,000 together with a spouse) in each of the last two years and reasonably expects to earn the same for the current year.
What is the SEC Rule 501? ›
SEC Rule 501 defines the terms used to talk about and define Reg D exemptions, including who are accredited investors—the most important definition contained in Rule 501. If you are considering issuing a Reg D offering, it's important to fully understand each of the key SEC Regulation D Rule 501 terms.
Is it better to be an accredited investor or not? ›
The benefits of being an accredited investor include access to unique investment opportunities not available to non-accredited investors, high returns, and increased diversification in your portfolio.
What makes me an accredited investor? ›
Who Qualifies to Be an Accredited Investor? An individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
What happens if you say you are an accredited investor? ›
Essentially, an accredited investor has the license to “drive” on the open road of the investment world, but they do so with full responsibility for the potential risks. These types of exempt securities offerings, which include many real estate syndications, are called private placements.
Can you invest in a company without being an accredited investor? ›
Non-accredited investors are also able to invest in private businesses, but these opportunities are limited and subject to other requirements, such as additional disclosures related to the investment.
