What Is a Non-Accredited Investor?
Let me explain what a non-accredited investor is: you're typically a retail investor who doesn't meet the financial criteria set by the SEC. This applies to most people in the market, and it contrasts with accredited investors.
Key Takeaways
- You are a non-accredited investor if you don't meet the SEC's income or net worth requirements.
- This means earning less than $200,000 annually, or $300,000 with a spouse, and having a net worth under $1 million excluding your primary residence.
- The SEC controls what you can invest in and requires specific documentation and transparency for those investments.
Understanding Non-Accredited Investors
As I mentioned, non-accredited investors are what we call retail investors. There are far more of you in the U.S. because the criteria for accredited status are strict. You're in this category if your annual income is under $200,000 individually or $300,000 combined with a spouse or partner, and your net worth is less than $1 million, not counting your main home.
You face limits on investment types to shield you from excessive risks and big losses from complex products you might not fully grasp. That's why the SEC sets rules on what you can buy and what info investment firms must provide.
Most options for you are publicly traded, like stocks, bonds, mutual funds, and ETFs. You can also go for alternatives such as REITs, real estate, and commodities.
Remember, the SEC came about after the 1929 crash and Great Depression to protect everyday folks like you from unaffordable or confusing investments.
Non-Accredited vs. Accredited Investors
An accredited investor could be a bank, company, or individual who doesn't need SEC protections. They have a net worth over $1 million excluding their primary home and income over $200,000 yearly, or $300,000 with a spouse, for the last two years, expecting the same this year.
The SEC now includes people with professional certifications, knowledgeable employees of private funds, and registered investment advisors in this definition.
The SEC might adjust this if inflation makes too many people qualify, as they did in 2020 by adding qualifications based on knowledge, experience, or certifications, and expanding entity types.
According to a 2023 SEC report, accredited investors were 18% of households in 2022.
Non-Accredited Investors and Private Companies
Private funds, companies, and hedge funds handle money differently from mutual funds because they mostly deal with accredited investors. The SEC assumes those investors understand the risks, so regulations are lighter.
These entities must comply strictly and keep investor numbers in check to maintain status. For some private investments, non-accredited investors like you are allowed only if you're employees or meet exemptions.
Other funds can include unrelated non-accredited investors, but numbers are capped, such as under 35 in Regulation D private placements.
Common Questions About Accredited and Non-Accredited Investors
What's the difference? The SEC bases it on net worth and salary: accredited ones exceed $1 million net worth excluding home and $200,000/$300,000 income for two years; if not, you're non-accredited.
Why accredit investors? It lets them access riskier assets, assuming they have the expertise or wealth to handle losses, protecting you from those risks.
How can you invest in private companies? Through equity crowdfunding, where small amounts from many investors pool together.
Can you invest in hedge funds? Generally no, as they're risky and less transparent, meant for accredited investors who can afford potential big losses. But you can invest indirectly by buying shares in publicly traded hedge fund operators or mutual funds that invest in hedge funds.
The Bottom Line
The SEC divides investors this way to protect those with lower net worths, salaries, or less understanding of risky investments. Accredited investors can take bigger risks because they have more money to lose.
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