Non-Accredited Investor

Non-Accredited Investor

What is an unaccredited investor

An unaccredited investor is any investor who does not meet the income and net worth requirements established by the Securities and Exchange Commission (SEC). The concept of an unaccredited investor stems from various SEC laws and regulations that refer to accredited investors. An accredited investor can be a bank or a business, but is primarily used to distinguish individuals who are considered to be financially informed enough to carry out their own investment activities without SEC protection. The current standard for an accredited individual investor is a net worth of more than $ 1 million, excluding the value of their principal residence or income of more than $ 200,000 per year (or a combined income of $ 300,000 with a spouse). An unaccredited investor is therefore anyone who earns less than $ 200,000 per year (less than $ 300,000, including a spouse) and who also has a total net worth of less than $ 1 million when their principal residence is excluded.

BREAKDOWN Unaccredited investor

Non-accredited investors make up the majority of investors worldwide. When people talk about retail investors, they often mean unaccredited investors. Basically, this term covers all those who hold less than $ 1 million in assets, apart from the value they may have in their home, and who earn less than $ 200,000, i.e. the large majority of Americans. Even though these numbers are not as far apart as when the definition was defined, accredited investors are still in the 95th percentile according to 2020 statistics from the U.S. Census Bureau. The SEC has the ability to change the definition of accredited investor if inflation and other factors cause too much of the general population to meet the standard.

Unaccredited investors and private companies

Unaccredited investors are limited in their investment choices for their own security. After speculation about the 1929 crash and the resulting depression, the SEC was created to protect ordinary people from investments they could not afford or understand. The SEC has used laws and regulations to define what an unaccredited investor can invest in and what these investments must provide in terms of documentation and transparency. Private funds, private companies and hedge funds can do things with investor money that mutual funds cannot simply because they deal primarily with accredited investors. The SEC assumes that all parties involved are aware of the risks and benefits involved, so they have a lighter regulatory feel with respect to these funds.

That said, these funds must pay close attention to their compliance and ensure that the number of investors remains within the rules as they may lose their regulatory status. For certain types of private investment, they are only allowed to invest without accreditation when they are employed or benefit from a specific exemption. Other funds and companies may have unrelated unaccredited investors, but they must keep the number below a certain level. This is the case with Regulation D, which keeps the number of non-accredited investors in a private placement below 35.

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