What is an accredited investor?

When you buy stocks and bonds, you’re investing in regulated securities. Of course, you can still lose money – and potentially lots of it – with these assets, but you can rest assured that the investment is registered with the Securities and Exchange Commission (SEC), which aims to ensure transparency and protect investors.

Anyone can buy regulated securities, but most everyday investors are barred from purchasing riskier assets that don’t offer the same levels of protection. However, the SEC authorizes certain people and entities – called accredited investors – to invest in unregulated securities. To qualify as an accredited investor, you need to meet at least one requirement such as having a high net worth, large income or financial experience.

This article introduces you to accredited investors, including what it takes to become one, the types of investments available to them and why the SEC requires investors to show sophistication before they can buy unregulated securities.

Requirements for accredited investors

To become accredited, investors need to show that they have sufficient assets or financial know-how to help them stay afloat in riskier waters without regulatory protection. There is no universal process for becoming an accredited investor, but before you can buy an unregulated security, you will need to show the issuer that you meet at least one of the accreditation requirements.

From a wealth perspective, you qualify if you have a net worth of at least $1 million – either individually or with your spouse or partner – excluding the value of your primary residence. If you earn an annual income of over $200,000 per year – or $300,000 in joint income with your spouse or partner – that is also enough to become accredited.

While meeting wealth and income requirements shows that you can more likely afford potential losses, you can also qualify as an accredited investor based on financial experience. This includes those who hold certifications, designations and credentials from educational institutions recognized by the SEC. For instance, you are considered an accredited investor if you have a license as a securities representative (e.g., FINRA Series 7) or similar professional certification.

There are other ways to qualify as an accredited investor that may be less common, such as working with family offices and holding a top position in the company selling the securities. Financial institutions like banking, insurance and investment companies are also accredited, as are trusts and other entities with assets over $5 million.

What accredited investors can buy

Under Regulation D, the SEC exempts some companies from registering their securities before they sell them – with the condition that they restrict the sale of these instruments to accredited investors. With this type of transaction, known as a private placement or an unregistered offering, the company sells its shares privately and is exempt from the strict disclosure requirements set for companies issuing public stock. As an investor, this means you may not receive the same level of detail about the company’s finances as you would when you buy a registered security.

In addition to private placements, there are other types of investments that generally restrict their availability to accredited investors. This may include hedge funds, venture capital funds, private equity funds and so-called “angel investments.”

Purpose of accreditation requirements

The types of investments available only to accredited investors share some common characteristics – they provide the possibility for an outsized return on investment (ROI), but they also could lead to substantial losses. It is because of this elevated level of risk that the SEC limits participation to those with the financial flexibility or expertise to afford the losses or grasp the risks.

In addition to protecting investors who are less prepared from securities that may be overly risky or complex, the accredited investor rules provide an important source of funding for early-stage companies looking to raise capital. By allowing these companies to sell securities to accredited investors, the SEC assures that they have an adequate pool of qualified investors to grow their business.

The bottom line

People and entities with the financial power and knowledge needed to navigate the pitfalls of riskier, unregulated securities can be recognized by the SEC as accredited investors. If you meet one of the accreditation requirements and have a high risk tolerance, investments like private placements and hedge funds can offer high potential returns. A financial advisor can help you determine if you qualify for accredited status and how unregulated securities could fit into your investment strategy.

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