Accredited Investor

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Accredited investor is a term used to define certain individuals and entities that are allowed to engage in higher risk investments, or to invest on a large-scale basis. Such investments may include seed money, hedge funds, private placements, and angel investor networks. Accredited investors are generally wealth individuals and such organizations as banks, insurance companies, large charities, and some retirement plans, endowments, and corporations. In the U.S., the Securities and Exchange Commission (“SEC”) designates investors as “accredited” once they have met very specific criteria. To explore this concept, consider the following accredited investor definition.

Definition of Accredited Investor

Noun

  1. An investor designated by the SEC to engage in certain high risk or large scale investments.
  2. An individual or married couple whose net worth exceeds $1 million (U.S.), excluding the value of the primary residence.

Origin

1933   U.S. Securities Act of 1933

Origin of Accredited Investors

Accredited investors are able to participate in investment opportunities as long as they comply with regulations put into place by the SEC. These regulations, and the origin of accredited investors, came about during the great depression in the late 1920s to prevent future stock market crashes. By having certain criteria into place, it reduces the amount of risks by ensuring individuals or entities have enough reserves in place to guarantee that the investment will not create issues for the economy.

Requirements for Obtaining Accredited Investor Status

An accredited investor may be an individual or a group of people that make up a legally instituted legal partnership. Both are required to meet certain criteria set by the SEC before obtaining accredited investor status.

Requirements for Individuals

The requirements for obtaining accredited investor status as an individual include:

  1. Having a net worth of over $1 million U.S. at the time the investment is being made; or
  2. Having an annual income of over $200,000 U.S. for at least the most recent two years.

Requirements for obtaining accredited investor status as a married couple include:

  1. Having a net worth of over $1 million U.S. at the time the investment is being made; or
  2. Having an annual income of over $300,000 U.S. for at least the most recent two years.

Even when this criterion is met, there is a 25% percent limit on the amount of investment based on the individual or couple’s net worth.

Requirements for Institutions

Requirements for obtaining accredited investor status as an institution, company, or other entity, include:

  1. The entity must be a bank, insurance company, small business investment company, or registered investment company.
  2. A director or general partner of the entity must be in charge of selling the securities.
  3. The entity must offer an employee insurance plan that falls within the requirements of the Employee Retirement Income Security Act, or have a plan with assets of more than $5 million U.S.
  4. All individual owners of the entity must be accredited.
  5. The entity must have over $5 million U.S. in assets at the time the investment is being made.

U.S. Securities and Exchange Commission

The U.S. Securities and Exchange Commission, also known as the “SEC,” is a federal agency charged with enforcing federal securities laws set forth in the Securities Act of 1933. The SEC also puts into effect rules and regulations that pertain to the securities industry. The three primary duties of the U.S. Securities and Exchange Commission include:

  1. Protecting investors
  2. Maintaining fair, orderly, and efficient markets
  3. Facilitating capital formation

When individuals or business entities fail to conform to the regulations put in place by the SEC, they may face steep fines and other legal remedies.

Securities Act of 1933

The Securities Act of 1933 requires companies that offer or sell securities to register with the SEC unless they are specifically exempt from registration requirements. Criteria for exemption from registration include:

  1. The company offers and sells no more than $5 million of its securities in a year.
  2. The company informs purchasers of its securities that they cannot be re-sold for a specified period of time, commonly six months or more.
  3. The company does not use general advertising methods to sell its securities.
  4. The company sells investments to no more than 35 individual investors, or an unlimited number of accredited investors.

Though these exemptions allow such a company to operate without registering their securities with the SEC, they are still required to file certain forms with the Commission. These forms provide the Commission with details about the company, which are made available to the public in many instances.

Related Legal Terms and Issues

  • Asset – Any valuable thing or property owned by a person or entity, regarded as being of value.
  • Business Entity – An organization established and existing apart from any other interest, business or personal.
  • Institution – An organization or society founded for a religious, social, business, or educational purpose.