What Is an Accredited Investor?
An accredited investor is an individual or a business entity that is allowed to buy unregistered securities, which are deemed higher risk because they are not registered with the Securities and Exchange Commission (SEC). In Regulation D, the SEC deems investors to be financially sophisticated and thus have a reduced need for the protection provided by regulatory disclosure filings, if they can satisfy at least one of several alternative requirements regarding their income or net worth, amount of assets under management or professional experience. Typically, accredited investors include high net worth individuals, investment professionals and their firms, banks, trusts and certain other businesses such as insurance companies.
The Income Requirement
To meet the SEC’s accreditation requirement using personal income, an individual must have an annual income exceeding $200,000 for each of the last two years with the expectation of earning the same or a higher income in the current year. The income requirement can also be met if an individual jointly declares income with a spouse, then the threshhold is income of $300,000 jointly over the last two years.
The Asset Requirement
Alternatively, if a person does not qualify based upon income, they could also meet the accreditation requirement if they have a net worth exceeding $1 million, either individually or jointly with their spouse, but excluding the value of their primary residence. In order to meet this requirement, typically one would have to present evidence of the existence of officially-priced assets, such as an official custodian account statement.
Professional Requirements – Qualified Investors
An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. However, an organization cannot be formed with a sole purpose of purchasing specific securities. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities. Individuals with investible assets exceeding $5 million are deemed Qualified Investors.
Finally, if a person can demonstrate sufficient education or job experience showing their professional knowledge of unregistered securities, they too can qualify to be considered an accredited investor. (This addition to the rule was approved in August 2020 and went into effect on December 8, 2020.)