Accredited vs Sophisticated Investor

When looking into investing, you've likely come across some opportunities that say that they're open only to accredited investors. It can be surprising for many to learn that all investments are not open to anyone and everyone. It would seem that as long as you have the minimum amount needed to invest, you would be able to do so. However, not everyone is able to make whatever kind of investment that they want. Many investment offerings fall into the Regulation D category, which is governed by many of the rules and regulations that have been put in place by the Securities Exchange Commission (SEC) to protect investors. For this reason, they're off limits to anyone who is not an accredited investor. Accredited investors are considered to be financially savvy and experienced, so do not require the same level of protection as inexperienced investors.

So, what exactly makes an investor accredited? In order to have accredited investor status, one of the following criteria must be met:

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A net worth of $1,000,000, excluding a primary residence  

An annual income of $200,00 (individually), or $300,000 (as a couple) for the past 2 years with the reasonable expectation that this will also be the case for the current year.

A knowledgeable employee who works with certain types of investment funds, or has a current Series 7, 65 or 82 license.

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Some of the types of investments that, often, only accredited investors can invest in are as follows:

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Hedge Funds

Venture Capital

Angel Investing

Many Real Estate Investments

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A non-accredited investor is essentially everyone else who does not meet the accredited investor criteria. As you can probably imagine, the majority of people fall into this category.  Although there is no stringent criteria specifically required to be met, a sophisticated investor should possess a level of financial knowledge that would allow them to understand and evaluate the risk associated with a given investment.

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In addition to the financial barrier that accreditation creates, there is also less accessibility to opportunities for non-accredited investors. Those opportunities open only to accredited investors are able to be advertised, making them highly accessible for those who seek them out and are qualified to invest in them. On the contrary, the types of real estate investments that allow the participation of non-accredited investors, 506(b) offerings, do not allow the sponsor to advertise, so a pre-existing relationship with a sponsor is required in order to gain access to the opportunity, making them less accessible.

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Disclaimer: The information provided in this post is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.