Next video:
Loading the player...

An accredited investor holds a special status.

Under Regulation D, the SEC defines accredited investors as those investors whose level of financial sophistication warrants a reduced need for protection. Essentially, accredited investors are knowledgeable and experienced enough to handle the risk that comes with investing in unregistered securities.

Certain securities and private funds can be exempt from SEC registration as long as they are only offered to, and bought by, accredited investors. Typically, accredited investors are banks, insurance companies, employee benefit plans, trusts, or the right individual.

For an individual to become an accredited investor, he must meet one of three criteria:

  1. He must earn at least $200,000 a year, or $300,000 with his spouse, in each of the past two years, and expect to maintain the same income.
  2. He must have a net worth exceeding $1 million individually or in combination with his spouse.
  3. Or he must be a general partner, executive officer, director or combination thereof for the issuer of a security.

Employee benefit plans or trusts with assets exceeding $5 million qualify as accredited investors.

The benefits of becoming an accredited investor lie in the ability to invest in certain offerings that are not available to common investors -- hedge funds being a prime example. They are complicated and risky, but that risk can mean higher returns.

Companies that market their securities to accredited investors have more protection in the form of reduced liability.

Related Articles
  1. Managing Wealth

    How to Become an Accredited Investor

    Accredited investors have more opportunities, such as investing in private equity. But, surprisingly, there is no set process for becoming one.
  2. Managing Wealth

    How Pro Athletes Can Protect Themselves as Investors

    Professional athletes with a high net worth need to understand the accredited investor status.
  3. Managing Wealth

    How To Start Your Own Private Equity Fund

    Here's a how-to guide on starting on starting a private equity firm.
  4. Insights

    Understand the SEC Rules on Equity Crowdfunding

    The SEC's adoption of equity crowdfunding rules, initiated under the JOBS Act, enables small investors to invest in companies that show early potential.
  5. Financial Advisor

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
  6. Small Business

    Crowdfunding Rule Lets Anyone Invest in Startups

    As of Monday, a belated provision of the 2012 JOBS Act goes into effect, allowing anyone and everyone to participate in fundraising for private companies and receive stakes in potentially high-growth ...
  7. Personal Finance

    Comparing Investment Strategies: The 1% Vs. the 99%

    Discover how the wealthy 1% differ from the other 99% when it comes to investment opportunities and other financial management concerns.
  8. Personal Finance

    Distinguishing a Qualified Institutional Buyer

    A qualified institutional buyer is a company that falls within the SEC’s category for accredited investors.
  9. Investing

    Getting To Know Hedge-Like Mutual Funds

    This type of alternative investment mutual fund gives investors the benefits of a hedge fund, without the need for high net worth. See if this strategy is right for you.
  10. Taxes

    Ways to Invest in Uber before It Goes Public (TAXI)

    A review of different strategies to profit off the success or failure of ride-sharing giant Uber before its IPO.
Hot Definitions
  1. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  4. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  5. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  6. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
Trading Center