Non-Accredited Investor

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Non-Accredited Investor

What Is a Non-Accredited Investor?

A non-accredited investor is any investor who does not fulfill the Securities and Exchange Commission’s income or net worth standards (SEC).The term “non-accredited investor” is derived from different SEC rules and regulations that relate to accredited investors.

An accredited investor may be a bank or a firm, although the term is most often used to identify people who are regarded financially skilled enough to manage their own investment operations without the protection of the SEC. Individual accredited investors must have a net worth of more than $1 million, excluding the value of their principal property, or an annual income of more than $200,000 (or $300,000 coupled with a spouse).

A non-accredited investor is someone who earns less than $200,000 per year (less than $300,000 with a spouse) and has a total net worth of less than $1 million when their principal home is omitted.

The Securities and Exchange Commission of the United States modified the definition of an accredited investor on August 26, 2020. According to a press statement issued by the SEC, “In addition to the current requirements for income or net worth, the modifications enable people to qualify as accredited investors based on established metrics of professional expertise, experience, or qualifications. The revisions significantly broaden the number of entities that may be accredited investors, including any business that fulfills an investing condition.” Accredited investors now include, among other things, persons with particular professional certificates, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisors.

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Understanding Non-Accredited Investors

Non-accredited investors account for the vast majority of investors worldwide. Non-accredited investors are often referred to as retail investors. Essentially, this phrase refers to anybody who has less than $1 million in assets, excluding the value of their home, and earns less than $200,000, which includes the great majority of Americans.

Key Takeaways

  • A non-accredited investor is any investor who does not fulfill the Securities and Exchange Commission’s income or net worth standards (SEC).
  • Non-accredited investors are those who earn less than $200,000 per year ($300,000 if a spouse is included) and have a total net worth of less than $1 million when their principal home is omitted.
  • The SEC governs what a non-accredited investor may invest in and what paperwork and transparency such investments must give.

Even if those percentages are not as far apart as they were when the criteria was established, according to 2015 U.S. Census Bureau data, accredited investors are still in the 95th percentile. The SEC has the authority to modify the definition of accredited investor if inflation and other circumstances result in too many people satisfying the criterion.

Non-Accredited Investors and Private Companies

Non-accredited investors have fewer investing options for their own protection. Following the 1929 Crash and the ensuing Depression, the SEC was established to safeguard ordinary people from entering into assets they couldn’t afford or comprehend.

The SEC employs legislation and rules to define what a non-accredited investor may invest in and what documentation and transparency such investments must give. Because they mainly deal with authorized investors, private funds, private firms, and hedge funds can do things with investor money that mutual funds cannot.

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The SEC thinks that all parties involved understand the risks and rewards involved, thus they apply a softer regulatory touch to these funds.

However, since they risk losing their regulatory status, these funds must pay strict attention to compliance and ensure that their investor numbers remain within the guidelines. Non-accredited investors are only permitted in some kinds of private investments if they are employees or have a special exception.

Other funds and corporations may have unrelated non-accredited investors, but the number must be kept below a specified threshold. This is true of Regulation D, which limits the number of non-accredited investors in a private placement at 35.

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