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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.

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