What Is an Accredited Investor?

What Is an Accredited Investor?

An accredited investor is a person who has sufficient knowledge of financial and business matters to evaluate the merits and risks of potential investments (or the company or private fund offering the securities reasonably believes this to be true).

There exist some investment instruments that are even more complex than standard stocks and bonds. These instruments require an in-depth knowledge of investing and finances and require the possession of enough financial assets to absorb large losses and risk. Thus, the accredited investor concept was invented to protect investors from themselves.

How Accredited Investors Work

There are many complex rules, regulations, and layers of paperwork to sell securities to the general investing public. To get around this, and to accommodate large financial institutions, the SEC allows special exemptions. Since accredited investors must meet a rigid standard that requires extensive knowledge and experience in capital markets, the SEC can relax some of their strict rules for selling securities.

An accredited investor can be a bank, brokerage, registered investment adviser (RIA), some employer-sponsored retirement plans, and some trusts. There is little need for an individual investor to seek to acquire the status of an accredited investor unless they are keen on hedge funds, venture capital, or selling shares on the market—in which case there is much more to do than find winning investments.

Requirements for Accredited Investors

To be an accredited investor at the individual level, a person must have an individual annual income of $200,000, or $300,000 on a joint basis for the past two years, and demonstrate that this income level will continue. An individual can also be considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse.

The SEC also allows individuals who are a general partner, executive officer, or director for the issuer of unregistered securities to become accredited investors. Along with these qualifications, other qualifications to be considered an accredited investor are:

• A bank, or savings and loan association; a registered broker or dealer; registered or qualified insurance companies; or small business development companies that meet certain criteria
• Licensed small business investment companies or employee benefit plans maintained by a state or it's agencies (the plan's assets must exceed $5 million)
• Employee retirement plans with investment decisions made by a financial agency (the plan's assets must exceed $5 million)
• A private business development company as defined in the Investment Advisor's Act of 1940
• An organization described in section 501(c)(3) of the Internal Revenue Code, not formed for acquiring securities, with assets of over $5 million
• Any person(s) with a single or combined net worth above $1 million, with some exceptions
• A trust with assets that total more than $5 million
• Any entity whose owners are accredited investors, within the guidelines set forth by the code

Criticism of Accredited Investors

One of the main problems with the financial requirements for becoming an accredited investor is that they're arbitrary and don't give insight into the full picture. Having lots of money doesn't mean you'll automatically make sound decisions, and not having lots of money doesn't necessarily mean you won't make sound decisions.