One of the major missions of the Securities and Exchange Commission (SEC) is to protect investors. The government doesn’t want anyone to risk their life savings in a vehicle that they either don’t understand or can’t absorb if there’s a loss. The title of “accredited investor” is major part of this.
In fact, the SEC maintains a series of so-called investor labels like this, all tied to an individual’s net worth and their understanding of the markets.
At a high level, accredited investors are those investors that are financially sophisticated to the point that they have a reduced need for protection by the SEC. Typically offered to private companies and high net worth individuals, accredited status is advantageous to those that meet the requirements because it expedites funding, opens up new capital raising avenues — including the sale of equity or debt securities without the need to register those securities with the SEC — and allows for different types of investment opportunities.
It isn’t too common, either.
On an individual level, there are just over 10 million households in the U.S. that qualify as accredited investors, according to the SEC.
How did they get there? Accredited investors satisfy one (or more) of the following requirements regarding income, net worth, asset size, governance status or professional experience as defined by Regulation D.
Here’s who they are.
Banks: “Any bank…or any savings and loan association or other institution…whether acting in its individual or fiduciary capacity; any broker or dealer registered…; any insurance company…; any investment company registered under the Investment Company Act of 1940 or a business development company…; any Small Business Investment Company licensed by the U.S. Small Business Administration…; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan… if the investment decision is made by a plan fiduciary…which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;”
Private Businesses: “Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;”
501(c)(3)s: “Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;”
Partners of the Issuer: “Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;”
High Net Worth Individuals: “Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.”
High income earners: “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;”
Large Trusts: “Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii); and”
Businesses with Qualifying Business Owners: “Any entity in which all of the equity owners are accredited investors.”
Although accredited investors enjoy certain privileges, there are still rules that apply.
For example, they must still abide by applicable state laws and they must still file a Form D disclosure document with the SEC after the first securities are sold.
Nonetheless, accredited investor status makes investing just a little bit easier for seasoned pros.