An accredited investor is someone with an approved status to invest in more complex ways than the average retail investor. An accredited investor is approved to invest in hedge funds, venture capital, angel investments, and private equity offerings among other opportunities. While financial regulation laws and enforcement agencies vary by country the common principle is to ensure that an investor understands the risk involved in their decisions.
Accredited investors are commonly defined as high net-worth individuals, bank trading desks, financial institutions, along with large corporations investing and hedging operations. Accredited investors are approved and given access to put their capital in more complex higher-risk investments as they have enough capital and income to not be ruined by losing money.
There are laws in many countries that require that specific types of financial offerings from hedge funds and risky investments can only be offered to accredited investors.
In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income of at least $200,000 each year for the last two years or $300,000 combined income if married and the expectation to earn the same amount this year.
As an example in the United States an accredited investor is defined in Rule 501 of Regulation D of the U.S. Securities and Exchange Commission using the following parameters.
- A bank, insurance company, registered investment company, or business development company.
- An employee benefit plan, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million.
- A charitable organization, corporation, or partnership with assets exceeding $5 million.
- A director, executive officer, or general partner of a company selling the securities.
- A business where the owners are accredited investors.
- A citizen who has an individual or joint net worth with a spouse of over $1 million or assets under management of $1 million or above. Excluding the value of primary residence.
- A citizen with an annual earned income over $200,000 or combined income with a spouse over $300,000 in the previous two years with a high probability of the same income in the current year.
- A trust with over $5 million in assets under management.
- A citizen who has specific professional certifications, credentials, or designations that are currently holding a Series 7, Series 65, and/or Series 82 licenses.
- Employees who are approved as “knowledgeable employees” of a hedge fund or money management operation.
- A limited liability company that has $5 million in assets can be designated as an accredited investor.
- Registered investment advisers and rural business investment companies may qualify and be approved by the SEC or the state they are in as accredited investors.
- Indian tribes and entities organized under the laws of foreign countries, that own U.S. “investments,” in excess of $5 million.
- The Investment Advisers Act can approve family offices with at least $5 million in assets under management.
- Spousal equivalents allow couples to pool their finances as a unit for both to qualify as accredited investors.
The purpose of filtering people as accredited investors is to protect them from their self and keep retail investors from taking on complex risks that they don’t fully understand. People that invest in things they don’t understand can lose money and not have enough cushion in their income or net worth to absorb a big loss. Accredited investors have to qualify for the risk they want and be able to financially handle the consequences of bad outcomes.