If you have been looking into various investment opportunities as of late, you may have noticed one or more terms identifying types of investors, such as accredited, non-accredited, or sophisticated. It is important to understand what these categories of investors mean and the types of opportunities they are free to pursue. With this understanding, you may gain an appreciation for or desire to obtain accredited investor status one day.
Accredited investors are an exclusive group of investors who fulfill the requirements of the Securities and Exchange Commission (SEC) for this status. To qualify as an accredited investor, the SEC requires you to meet one of the following conditions laid out in Regulation D, Rule 501:
- Net Worth: Net worth greater than $1 million USD, minus the market value of a primary residence.
- Individual Income: Greater than $200,000 USD for the previous two years with the expectation of earning the same in the same year.
- Joint Income: More than $300,000 USD per year with a spouse or spousal equivalent for the previous two years with the expectation of making the same amount or more the same year.
- Knowledgeable Employees: Executive officers, directors, advisory board members, trustees of a private fund, or an employee of such a fund who participates in the fund’s investment activities and has done so for one year or more.
- Certain Professional Certification: A person who possesses at least one professional designation, certification, or credential from an accredited educational institution the SEC has identified as qualifying the person as an accredited investor.
Various entities also qualify for accredited investor status, family businesses, corporations, family businesses, and tribal entities.
Private investment offerings operate under less regulation because they only allow participation from accredited investors. The idea behind these restrictions is investor safety in a reduced regulated private offering environment.
According to the SEC, sophisticated investors have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” These investors lack formal classification but are recognized for the knowledge they possess.
In the U.S. there are more investment opportunities available to accredited investors than to sophisticated investors. It should be noted that sophisticated investors may invest in Rule 506(b) offerings. Under Rule 506(b), the number of sophisticated investors who may participate in an offering is 35 max.
The gold standard is still accredited investor status. This is the status that opens the door for a wider array of more profitable investment opportunities. Those seeking greater levels of investments should focus on meeting the verification standards established by the SEC for an accredited investor.