An accredited investor or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor, and the consequences of being classified as such, vary between countries. The criteria involved differentiates this class from a regular investor in a number of important ways.
The importance of being an accredited investor is explained by the following paragraph taken from the SEC website
Under the federal securities laws, only persons who are accredited investors may participate in certain securities offerings. One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.
Examples of who and how accredited investor status can be achieved are given in the section below.
Example of an Accredited Investor
In the United States, for an individual to be considered an accredited investor, they must have
- a net worth of at least $1,000,000, excluding the value of one’s primary residence,
- or have income at least $200,000 each year for the last two years (or $300,000 combined income if married)
- and have the expectation to make the same amount this year
The following section (heavily edited for space) demonstrates the scope of the term “accredited investor” as defined in Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC)
- Any bank or any savings and loan association or other institution whether acting in its individual or fiduciary capacity; any broker or dealer, any insurance company, any investment company, any Small Business Investment Company
- Any private business development company
- Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership
- Any director, executive officer, or general partner of the issuer of the securities being offered or sold
- Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year
- Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered
- Any entity in which all of the equity owners are accredited investors.
