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 or an income of more than $200,000 annually (or $300,000 combined income with a spouse).
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.
On August 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.
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 that 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.
Key Takeaways
- A non-accredited investor is any investor who does not meet the income or net worth requirements from 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.
Even though those numbers are not as far away as when the definition was set, accredited investors are still in the 95th percentileaccording to 2015 statistics from the U.S. Census Bureau. 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.
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 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.
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 accredited and non-accredited investors? ›
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.
Did the SEC change the definition of accredited investor? ›
[2] The number of individuals who qualify as accredited investors has likely also increased as a result of the SEC's 2020 amendments to include as accredited investors individuals holding in good standing certain professional certifications or designations, as well as knowledgeable employees of certain private funds.
Who are accredited investors as defined in Rule 501 A of Regulation D under the securities Act? ›
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 advisors.
What are the restrictions for non-accredited investors? ›
Non-accredited investors are limited by the SEC from some investment opportunities for their own financial safety. The SEC also set regulations on the disclosure and documentation of the investments available to the investors. For example, non-accredited investors are eligible to invest in mutual funds.
What's the difference between accredited and 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.
Do all 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.
What is the rule 144 for accredited investors? ›
Rule 144 provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time.
What is rule 144 of the securities Act? ›
Rule 144 creates a safe harbor from the Section 2(a)(11) definition of “underwriter.” A person satisfying the applicable conditions of the Rule 144 safe harbor is deemed not to be engaged in a distribution of the securities and therefore not an underwriter of the securities for purposes of Section 2(a)(11).
What is the SEC review of accredited investors? ›
The SEC is particularly focused on the extent to which accredited investors have financial sophistication, ability to sustain the loss of investment and access to information that have traditionally been associated with an ability to fend for themselves, as well as, the impacts to participation in Regulation D ...
The SEC defines an accredited investor as someone who meets one of following three requirements: Income. Has an annual income of at least $200,000, or $300,000 if combined with a spouse's income. This level of income should be sustained from year to year.
What is the rule 506 for accredited investors? ›
Accredited investors are generally large financial institutions, such as investment banks, or high net-worth individuals. Rule 506 bans general solicitation of the securities. That is, issuers may not advertise their offering to a broad audience.
What is the difference between a qualified investor and an 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.
What is the 35 non-accredited investor rule? ›
Who can invest in 506(b) securities offerings? Rule 506(b) permits GPs to raise money from an unlimited number of accredited investors and as many as 35 non-accredited investors.
What happens if a non-accredited investor invests 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.
How many non-accredited investors are allowed in Regulation D? ›
The company cannot use general solicitation or advertising to market the securities. The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchasers.
Is it better to be an accredited investor? ›
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.
Can you raise money from non-accredited investors? ›
If a company raises capital from non-accredited investors in Rule 505 or Rule 506 registration-exempted financing, it must provide important information about the company. With that, it can lead to increased legal and accounting costs.
Are non-accredited certificates worth it? ›
A non-accredited certification will often help you get started and you can always get accredited later if you feel it will help you professionally. For people who want to start their careers and learn as they go, non-accredited certification courses are suitable for them.
Can a non-accredited investor invest in a startup? ›
By far the most common exemption for startups is the 506(c), which requires all investors to be accredited investors. The company must take reasonable steps to verify that all purchasers are accredited investors.
