Loading the player...

What is an 'Accredited Investor'

An accredited investor is a person or entity that can deal with securities not registered with financial authorities by satisfying one of the requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural individuals, banks, insurance companies, brokers and trusts.

BREAKING DOWN 'Accredited Investor'

Because raising capital entails costly regulatory filings, many companies offer securities to accredited investors, exempting the companies from registering securities with the SEC. Regulatory authorities verify that an individual or entity possesses necessary financial means or knowledge to take investment risks in unregistered securities, before he is considered an accredited investor.

Accredited Investor Requirements

To be an accredited investor, a person must demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income. An individual must have earned income above the thresholds either alone or with a spouse over the last three years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse. The exception to this rule is when a person is married within the period of conducting a test. A person is also considered an accredited investor if he has a net worth exceeding $1 million, either individually or jointly with his spouse. The SEC also considers a person to be an accredited investor if he is a general partner, executive officer, director or a related combination thereof for the issuer of unregistered securities.

An entity is an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. An organization cannot be formed with a sole purpose of purchasing specific securities. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

In 2016, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors. Also, if a person can demonstrate sufficient education or job experience showing his professional knowledge of unregistered securities, he is also considered an accredited investor.

Purpose of Accredited Investor Requirements 

The SEC has adopted requirements for accredited investors to protect those who may be unable to sustain economic risks of investing in unregistered securities. When a company or individual engages in an unregistered securities offering, it bypasses registering valuable information with the SEC, which may mask certain risks inherent in these investments. Participants in these private placements are vulnerable to losing their entire investment. 

Example of an Accredited Investor

Consider an individual who earned $150,000 of individual income for the last three years and reported a primary residence value of $1 million with mortgage of $200,000, a car worth $100,000 with outstanding loan of $50,000, 401(k) account with $500,000 and a savings account with $450,000. While this individual fails the income test, he is an accredited investor according to the test on net worth, which cannot include the value of primary residence and is calculated as assets minus liabilities. The person's net worth is exactly $1 million, which is calculated as his assets of $1,050,000 ($100,000 plus $500,000 plus $450,000) minus a car loan of $50,000.

RELATED TERMS
  1. Accredited Personal Financial Planning ...

    Accredited Personal Financial Planning Specialist is a professional ...
  2. Private Placement

    A private placement is a capital raising event that involves ...
  3. Non-Accredited Investor

    A non-accredited investor is anyone who fails to meet the SEC ...
  4. Exempt Transaction

    An exempt transaction is a type of securities transaction where ...
  5. Unregistered Shares

    Unregistered shares, also called restricted stock, are securities ...
  6. 2000 Investor Limit

    The 2,000 investor limit is an SEC rule requiring a company to ...
Related Articles
  1. Managing Wealth

    How to become an accredited investor

    Accredited investors have more opportunities that non-accredited investors 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

    Use this how-to guide to launch your own private equity firm.
  4. Investing

    Crowdfunding for Non-Accredited Investors

    JOBS allows non-accredited investors to participate in crowdfunded investments, learn how crowdfunding platforms can work to your advantage to be funded.
  5. Insights

    The SEC: A Brief History Of Regulation

    The SEC has continued to make the market a safer place and to learn from and adapt to new scandals and crises.
  6. Tech

    Could This Fundraising Mechanism Step in For ICOs?

    The recently-formed Institute for Blockchain Innovation has proposed JOBS Act Coin Offering (JCO) as an alternative to ICOs.
  7. Personal Finance

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  8. Insights

    Understanding the SEC

    The SEC's triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it a vital player in capital markets.
  9. Investing

    Private Equity Real Estate Funds vs. REITs

    REITs and Private Equity Real Estate Funds are two different ways to invest in real estate.
RELATED FAQS
  1. What are unregistered securities or stocks?

    Before securities, like stocks, bonds and notes, can be offered for sale to the public, they first must be registered with ... Read Answer >>
  2. What Is an Unregistered Mutual Fund?

    An unregistered mutual fund is a general name for funds not formally registered with the SEC. Read Answer >>
Trading Center