You may be familiar with the term accredited investor and also aware that some deals require accreditation of some sort. However, when it comes to the world of investing, what is the definition of an accredited investor, what are the SEC accreditation requirements, and what purpose does such an investor serve?
Regardless of whether you are simply interested in becoming an accredited investor or you need one of these investors in your business, here is some important information to know.
Definition of Accredited Investor
An accredited investor is an individual or institution that conforms to specific requirements involving the purchase of securities not available to the general public. Specifically, the Securities Exchange Commission (SEC) requires that a company offering or selling its securities needs to register the securities with the SEC or obtain exemption from the requirements for registration. One exemption involves selling the securities to an accredited investor.
Accredited Investor Qualifications
Rule 501 of Regulation D provides the definition of accredited investor in accordance with the SEC accreditation requirements.
In general terms, and accredited investor can be a brokerage, bank, certain trusts, certain employer-sponsored retirement plans, or a registered investment advisor (RIA).
To meet SEC accreditation requirements as an individual, a person must have a yearly income of $200,000 (or $300,000 with a spouse), over the previous two years and have the ability to demonstrate the same or greater income level will be achieved in the current year. In addition, accredited investor status is recognized for individuals with a net worth greater than $1 million (not including the value of the person’s primary residence), either as an individual or jointly with a spouse. A director, executive officer, or general partner of the issuer of the securities being offered or
sold, or a director, executive officer, or general partner of a general partner of that issuer is also be an accredited investor.
Purpose of an Accredited Investor
The main purpose of the SEC as it concerns the establishment of accredited investor requirements is to protect the everyday investor and permit exemptions that put in place an adequate and protective shield between the general investing public and potentially complicated investment securities that pose elevated risks to the everyday investor.
