Investing Assets & Markets Mutual Funds What Is an Accredited Investor? Definition & Examples of an Accredited Investor By Kent Thune Updated on July 31, 2021 Reviewed by Gordon Scott In This Article View All In This Article What Is an Accredited Investor? How Accredited Investors Work Requirements for Accredited Investors Criticism of Accredited Investors Photo: Joos Mind / Getty Images Definition An accredited investor is a person or institution that meets certain requirements to purchase securities that are not offered to the general public. 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. Note The SEC's main purpose is to protect the everyday investor. Allowing an exemption for an accredited investor at least creates a sufficient and protective layer between potentially complex investment securities and the general investing public. 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. Note In some cases, if a person can demonstrate education and experience with unregistered securities, they may be considered an accredited investor. 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 criteriaLicensed 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 1940An organization described in section 501(c)(3) of the Internal Revenue Code, not formed for acquiring securities, with assets of over $5 millionAny person(s) with a single or combined net worth above $1 million, with some exceptionsA trust with assets that total more than $5 millionAny 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. Key Takeaways An accredited investor is a person or institution that meets the requirements to purchase certain securities not offered to the general public. An accredited investor must have an income of at least $250,000 for the previous two years.An accredited investor can have a net worth of $1 million, either alone or with a spouse.The value of your primary residence can't be included in your net worth calculation. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. SEC. "Updated Investor Bulletin: Accredited Investors." Accessed August 21, 2020. Electronic Code of Federal Regulations. "Title 17: Commodity and Securities Exchanges. Part 230—General Rules and Regulations, Securities Act of 1933." Accessed August 20, 2020.